Fiscal Policy

Fiscal policy refers to the changes in government’s choices regarding the overall level of government spending and taxes to influence the behavior of the economy. Fiscal policy can expand or contract aggregate demand. The government sometimes uses the fiscal policy instruments in an attempt to stabilize the economy. Under a recession, an expansionary fiscal policy is adopted, which involves lowering taxes and/or increasing government spending. In an overheated expansion with an inflationary pressure, a contractionary fiscal policy is utilized, which requires higher taxes and/or reduced government spending. Economists and policymakers disagree about how active the government should be in these fiscal policy efforts.

Based on the above summary and the detailed descriptions of the fiscal policy issues in the textbook (Chapter 33) discuss the following questions:

• What are the expansionary and contractionary fiscal policies? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today?
• Should the government balance its budget? If you think it should, what steps do you suggest that it take to balance its budget?
• What is the relationship between budget deficits and national (public) debt? Why the U.S. national debt has been increasing for decades?
• Should the tax laws be reformed to encourage saving? Do you think consumption tax is better than income tax?