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Fiscal Policy Essay

562 words - 3 pages

Fiscal Policy
1. Meaning of Fiscal policy
Fiscal policy refers to the way government utilizes taxation and spending with the aim of influencing the overall economy. Usually, the government use fiscal policy to ensure strong and sustainable economic growth and reduce poverty (Horton & El-Ganainy, 2009). The function and objectives of fiscal policy have increasingly gained popularity in the current financial crisis as most governments have stepped in to promote financial systems, jump-start growth, and solve the implications of the crisis on vulnerable groups. The main goals of fiscal policy include
* Maintain low rate of inflation
* Stimulate economic growth especially during economic recession
* Typically, fiscal policy works to stabilize economic growth, bust economic cycle and avoid a boom
1. Responsibility for fiscal policy
The executive (the president) and the ...view middle of the document...

The government also influences the economy by changing the types and the rates of taxes, the composition and extends of government expenditure, and the level and form of borrowing.
3. Difference between federal purchases and federal expenditures
Federal purchases denote federal expenditure where the federal government gets goods and services in return, such as an airplane carrier. Federal expenditures comprise of interest on the national debt, federal purchase plus grants to local governments and to state, and transfer of payments (Horton & El-Ganainy, 2009).
4. Are federal purchases higher today as a percentage of GDP than they were
in 1960?
Federal purchases as a percentage of GDP are currently lower than in 1960, but federal expenditures have increased compared to those of 1960. The clearest way to evaluate the level of government burden or debt is by comparing overall government budgets to Gross Domestic Product. By these criteria, the federal government spending is today higher than any given time in history. Between the 2009 and 2012 financial year, the average federal outlays were estimated at over 24.2 percent of GDP, which is the highest GDP-to government ratio since 1945 and 0ver percent points higher than the average size of government since the demobilization of military after the World War II estimated at 20 percent (McQuain, 2012). Unrestricted increase in the retiring population or the old relative to the working population denotes a rise in transfer payments in the type of government expenditure on Medicare and on social security programs. Unless the federal government chooses to reduce the level of spending, federal government expenditure as a percentage of GDP will increase sharply.

Horton, M., & El-Ganainy, A. (2009). Back to Basics:What Is Fiscal Policy? International Monetary Fund.
McQuain, B. (2012). Federal spending a higher percentage of GDP than anytime since WWII.

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