An Analysis Of Fiscal Policies: Types, Effects, And Limitations

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An Analysis of Fiscal Policies: Types, Effects, and LimitationsDescribe the various fiscal policies used by the government the effects they have on theeconomy and the limitations of such policiesAnswer:The government use fiscal policy toinfluence the economy by its revenue collectionandspending.Fiscalpoliciesthattrytoincreaseoutputoftheeconomyareknownasexpansionary policies. Fiscal policies intended to decrease outputof the economyare known ascontractionary policies.1)Expansionary fiscal policy:This policy is used to encourage growth, either when the countryis in recession or government is trying to prevent a recession.This can be achieved by twoways:a)Increasing government spending:Federal government increase its spending by buyingmore goods and services. It causes a chain of events that raises output and increasejobs. Increase in demand will lead to price rise. This will encourage producers toproduce more which will result in higher productivity and more jobs.b)Cutting Taxes: If government decides to cut taxes people will have more money tospend which will trigger higher demand and that will cause price to rise. This willincrease demand, output and prices.2)Contractionary fiscal policy:This policy is used when government decides to slow down theeconomy. This is needed when the demand of the economy is more than the supply. Thiscan be achieved by two ways:a)Decreasing government spending: If the government decides to buy less goods andservices it will lead todecrease in aggregate demand.Decrease in demand will causeprices to fall. Lower prices will encourage suppliers to cut down their production.b)Increasing taxes:When government increase taxes individual has less money to spendon goods. This leads to decrease in demand and overall production.Limitations of fiscal policies:1)Difficulty of changing spending level: Increasing or decreasing the amount of federalspending is not an easy task.As most of the spending is fixed and only a portion ofbudget can be adjusted for change in spending.Significant changes in federal spendingcomefrom smallpart that requiresdiscretionary powers. This gives government lessfreedom in increasing or decreasing spending.2)Predicting the future:Fiscal policy is used to prevent big changes in the GDP. Despitethe available statistics it is very difficult to tell the state of the economy.Predictingfuture economic performance is very difficult.

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