Macroeconomic Principle and Policy

Fiscal policy is a "government spending policies that influence macroeconomic conditions." (Investopedia). This policy along with its sister strategy, monetary policy, is to control all levels of economics including tax rates, interest rates and government spending. Fiscal policy also is a deciding factor for the spending money for goods or services (public expenditure), the area of the nation's economy under private rather than governmental control (private sector), and influences the distribution of wealth. In order to accomplish this, the Federal Reserve uses three tools: open market operations, the discount rate, and reserve requirements. (Reem). The main purpose of the fiscal policy is: mobilization of resources, acceleration of the economic growth, and to minimize the inequalities of Income and Wealth.

There are three components included in the fiscal policy, which are: the taxation policy, the public expenditure policy, and the public debt policy.

In our society, the United States, fiscal policy actions must be proposed, considered, and passed, processes which can take a considerable amount of time. Time lags can adversely affect the efforts of the Congress and the President in attempting to maintain a healthy economy. There are three types of time lags: (Reem)

1. Recognition Time Lag: It usually is some time before we know when the economy has a decline or incline in activity. It also takes time to collect the information about the present situation of the economy. So, in other words the government is about 6 months behind the curve, when it comes to trying to jump-start the economy.

2. Action Time Lag: This is the time needed after acknowledging an economic problem and putting a policy into effect. The financial plan process can be long and complex and politicians seldom agree on a decision.

3. Effect Time Lag: It can take some time before the changes in policy actually have an effect on the economy.

As a result greater time lags determine the effect of fiscal policy and could make