How Does The Federal Government Implement Its Fiscal Policies?

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How Does The Federal Government Implement Its Fiscal Policies?

2 Answers

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Answer 1

Decisions by the President and Congress, usually relating to taxation and government spending are known as fiscal policies. The goal of most fiscal policies is to achieve full employment, price stability and economic growth. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. On the other hand, the government could choose to increase public spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to trickle its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.
So in terms of policies regarding a Federal government, major building projects or large scale changes to public transport may well influence how money is distributed in society, with more employees earning money and spending it accordingly, as well as the tax that they would pay on those earnings. Governments can be more direct however. In George W. Bush’s second term in office his government issued millions of dollars in tax rebates in the hope that the recipients would spend their windfall and therefore stimulate the economy.

Answer 2

The federal government implements fiscal policy utilizing its many legislative venues, each State has its own legislators that set fiscal policy for each of their own States, the Federal government has the senate and house to set its fiscal policies with the President approving laws passed by the combined Senate and House of Representatives. The government has implements its fiscal policies via automatic controls and legislative changes. Automatic controls are ones that do not have to be voted on. These policies, such as; unemployment insurance and progressive taxes are already in place and have the most affect on the short-run changes in economic business cycles by dampening the rising or decreasing of income and spending. Whereas the legislative policy changes involving taxes or spending take time to write, be voted on and then implemented. The problem with these policies is the possible over-correction for a temporary fluctuation in the market. For today’s market, I would have chosen an expansionary policy that was cognizant of the potential recovery and reduced the targeted levels. Taking into consideration how the automatic controls operate to keep the peaks and valleys down to small hill and dales. Increases in the government spending coupled with tax cuts will result in an increase in overall incomes as more jobs become available. These increases will increase production and employment to meet the aggregate demand. In the business cycle, this will result in an increase in consumer spending which will result in an increase in prices that will then start the cycle of restricting purchases due to the lower purchasing power of the consumer’s money.