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A comparison between fiscal policy and monetary policy essay 1000 words
A comparison between fiscal policy and monetary policy essay 1000 words
Analysis of the business cycle
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industries through different measures. To see how fiscal policy works, consider a business cycle. A business cycle refers to cyclical movements in the level of economic fortunes of a country. A boom period refers to the highest prosperity level. It describes a situation where out-put level is high, employment, national income, and all macro-economic variables are at desirable high levels. A recessional phase of the business cycle refers to a downward turn in the economy. It is characterized by falling levels of aggregate demand, output, income and employment. An economy is in a depression phase when things are completely down and there is widespread unemployment and general misery. A recovery phase refers to a situation when an economy is picking up again. If it continues it can get back to the boom period again. This cycle …show more content…
Lower taxes can be used to stimulate demand for goods and services by increasing disposable income thereby bringing about changes that can increase income, output and employment. In a micro economic context, taxes can be used to regulate consumption of certain goods in the economy. If government wishes to discourage the consumption of say cigarettes, it can raise the tax on cigarette and vice versa. In addition, the government can encourage the production of certain goods in the economy by lowering taxes on them, while it may raise taxes if she wants to discourage their production. Arguments have also been made to justify the imposition of taxes on income distribution grounds. By levying in a progressive manner, the gap between the rich and the poor is bridged To answer the question of how monetary and fiscal policy can be used to influence the level of economic activities and whether or not the coordination of such policies is crucial for a Government is to achieve its macroeconomic policy objectives, let’s discuss the objectives of fiscal and monetary policy OBJECTIVES OF FISCAL
In Keynesianism, government uses fiscal policy, which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high, and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the amount of income that goes to financial responsibilities. When people have more money, they are able to spend more, which in return goes into jump starting the economy.
Hall, A. (2001, August). The Flat Income Tax and the Fair Tax Consumption Tax: A
The Classical economists believe that these are “temporary” changes that will correct themselves in the long run. They feel that an economy will always tend towards operating at its potential output (as given by the long-run aggregate supply curve. Nothing needs to be done by the government because normal market forces will serve to self-correct these issues. On the other hand, Keynesian economics argue that the gap between the lower and the potential levels of output is due to a change in aggregate demand. They argue that this gap can exist for a long time and that the gap can be pushed to close faster if the government enacts fiscal and monetary policies. There are differences in how each policy works to close the recessionary gap caused by a drop in aggregate
...roportionally higher taxes and come of welfare benefits, moderating the disposable income. As incomes fall in a recession the impact the falling incomes have for income earners is softened as high income earners pay less tax proportionally, and retain more post-tax income, while the low income earners receive benefits, thus injecting into the economy and moderating a downturn in the economy, this is fiscal boost.
Introduction: In the year 1862 during the civil war congress implemented the first income tax in America. It was 3% per year. However, it was not until 1913 when the 16th Amendment to the Constitution was passed, which granted the government the ability to impose a tax on individuals’ income. Since then it has been an issue to determine how much people should be taxed. Tax rates in America change drastically; for example, in 1963 a person in the highest tax bracket would give 90.8% of their income to the government. In contrast, that same person would only pay 28.0% in 1988. The tax rate for income tax is an issue because for every dime that someone pays in taxes is one dime that they are not able to spend themselves. Additionally, people
Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.
This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector.
The use of taxes is one of the government's favorite ways to make its presence known in the economy. While this method seems blatantly obvious, many of the ways the government uses the money collected by taxation is not. Some of the money it takes is used to fund other programs designed to "protect" consumers and to "create" jobs. Be...
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The appropriate role of government in the economy consists of six major functions of interventions in the markets economy. Governments provide the legal and social framework, maintain competition, provide public goods and services, national defense, income and social welfare, correct for externalities, and stabilize the economy. The government also provides polices that help support the functioning of markets and policies to correct situations when the market fails. As well as, guiding the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By applying the fiscal policy which adjusts spending and tax rates or monetary policy which manage the money supply and control the use of credit, it can slow down or speed up the economy's rate of growth in the process, affecting the level of prices and employment to increase or decrease.
...ot let this inequality gap continues to rise; therefore, the government needs to tax heavily onto the rich people, and redistribute their money to the poor.
Taxation is a compulsory levy imposed on the income, value of goods and services of individuals, partners and companies by the government. It is can be said to be an approach of imposing tax on the citizen. This imposition of tax, is expected to yield income which should be utilized in the provision of both basic and substantial infrastructural amenities, both social and security, as well as creates conditions for the economic well-being of the society at large.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
The Prosperity phase of a Business cycle is the highest point in the economic. It is also called the peak. At this point in the economy’s full employment, i.e., all persons in employment and production is at its highest level. Since no labor or production capacity remaining, there is no further economic growth. “The features of prosperity are high level of output and trade, high level of effective demand, high level of income and employment, rising interest rates, Inflation, Large expansion of bank credit, business optimism and high level of MEC (Marginal efficiency of capital) and investment (Brian Bass).” The level of production is maximum and there is a rise in GNP (Gross National Product). On the other hand, Recession phase is where economic activity becomes slower. At this stage production, investment, trade and...