Fiscal Policy

Fiscal policy

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By Zina S. Elais

Student No.8311

Managerial Economics (ECON 601)

NYIT Amman compass

Contents

Introduction to fiscal policy

What is fiscal policy and why?

Who is responsible for it?

Fiscal policy instruments

Jordan's fiscal policy

Conclusion

References

Introduction to fiscal policy

Following the Second World War, it was determined that the government had to take an active role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mixture of both fiscal and monetary policies, governments are able to control economic phenomena. The global economic crisis that broke out in 2008 has reawakened interest in fiscal policy.

Government crises whether it was local or international often have financial-pinning's that could have been avoid with better budget system  and mechanisms of finance;  misusing the fiscal policy leads to economical and political instability

One of the biggest obstacles facing decision makers is deciding how much involvement the government should have in the economy. Economic policy consists of fiscal and monetary policies; Fiscal policy is used to direct a country's economic goals this includes a government adjusts its levels of spending in order to monitor and influence a nation's economy. Monetary policy is similar to the fiscal policy but not the same; monetary policy is when a central bank influences a nation's money supply. Here we take a look at the how fiscal policy works.

What is fiscal policy and why?

Fiscal policy is the degree of which government spending and taxation  influence the economy. (1) Fiscal policy effects economic growth, business activity, job creation and unemployment, inflation and controlling budgets, budgets are in surplus if revenues exceed expenditures, and are in deficit if expenditures exceed revenues.

Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced the gross domestic product (GDP).as well as making decisions on how pubic resources are utilized and works through the economy. These policies should emphasize that the government don't run out of money before they run out of the service that need to be provided. (2)

Lag time is the time it takes to implement fiscal policy. For example, governments around the world announced several fiscal and monetary policy initiatives to deal with the 2008 financial crisis, fiscal policy measures was income tax cuts and stimulus spending, these procedures often require changes to existing legislation or the creation of new legislation. Central banks, including the U.S. Federal Reserve, implemented the monetary policies very quickly, including cutting interest rates and increasing the money supply. Monetary policy changes affect the economy faster because financial institutions generally match Federal Reserve rate cuts immediately.

 fiscal policy is rather Expansionary or contractionary; Expansionary fiscal policy is defined as an increase in government expenditures and/or a decrease in taxes that causes the government's budget deficit to increase or its budget surplus to decrease. Contractionary fiscal policy is defined as a decrease in government expenditures and/or an increase in taxes that causes the government's budget deficit to decrease or its budget surplus to increase.

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 (1)Fiscal Policy Rules

 By George Kopits, Steven A. Symansky

(2)Fiscal Administration: Analysis and Applications for the Public Sector

 By John L. Mikesell

Who is responsible for it?

The White House and the Congress are jointly responsible for setting fiscal policy in the US.

The Government is responsible for setting fiscal policies in Jordan. Central bank of Jordan is responsible for monetary policies.

Fiscal policy instruments

Fiscal policies instruments are taxes, government expenditure and public dept;

Taxes

A common form of fiscal policy is use of the taxation, if the government feels like the economy is growing too quickly it may increase taxes to stimulate the economy in order to control transactions or to control deficits. On the other hand to expand the economy or to rise the demand, government might reduce taxes (for example income tax or expenditure tax) this will rise purchase power parity and increase demand (for both consumption and  investments) although  governments use taxes to control production, consumption and National Income.