Topic

Fiscal Policy, Deficits, and Debt

Instructions

Read pages 685-697 of Economics.

Consider the following as you read:

What are the purposes, tools, and limitations of fiscal policy?
How does the cyclically adjusted budget reveal the status of U.S. fiscal policy?

Answer preview

Fiscal policy is considered to be the means by which the government makes different adjustments in its spending levels and tax rates so as to influence a country’s economy. This can be seen as the sister strategy to monetary policy where by the central bank impacts a country’s money supply. Spending and taxes are the two major tools of fiscal policy. It is clear that taxes usually impact the economy by ascertaining the amount of money the government will spend in particular sectors as well as the amount of money people will have to spend. On the other hand, there a number of limitations associated with fiscal policy and they include policy lags, forecasting, fiscal selectivity, and fiscal measures inadequacy among others.

Word count: 204