Question

describe the three fiscal policy tools at the government's disposal to stimulate or contract the economy. Find an example of fiscal policy in your life.  

• Describe the policy tool.  
• Explain how it impacts your life using a current policy that is in effect Find a news article that describes this policy. (For example, the state of California is expanding the Fast Pass lane near my home, which is causing traffic and is suppose to eventually reduce traffic on the 15 FWY. However, if I wish to use this lane, I will have to pay to use it (tax) and my tax dollars are currently paying for it. But, there is a beneficial macro-impact on the economy due to increased employment and spending.)
• Explain how it impacts the macro-economy. Use as many economic principles and the AD/AS or the expenditure function model to illustrate the impacts.
• Cite your sources in MLA

Answer 1

Main fiscal policy tools

Taxes: Another major fiscal policy tool. By taxing the public, the government earns revenue which it can further use for public expenditure. Moreover, taxing a consumer affects the disposable incomes of people and hence their consumption patterns. Thus, taxing is an effective way of influencing economic output via the route of consumption expenditure.

Public Spending: Government spending is an important tool of fiscal policy. The Government can stimulate the economy via public spending which influences economic output. Further, this tool generally has a multiplier effect attached with it, thus, it also stimulates consumer spending and hence aggregate demand in the economy.

Transfer payments: This policy tool also leads to change in consumer income which directly affects economic output of a nation. It is a tool used to redistribute income between the masses and thus is an important tool for fiscal policy.

In the state of Texas, sales tax rates have shot up. With the expanded revenue, the Government is planning on subsidizing property taxes that would benefit homeowners and business owners. This is a case where the Government is using taxes as a fiscal policy to generate revenue. The macroeconomic impact of such a policy might well be negative as the poorer people would suffer at the hands of the rich. Higher sales tax would likely impact the poorer masses much more than the elites. Subsidizing property taxes will also only benefit the rich as the poor won't have much property to begin with.

As sales tax goes up, the consumer spending might lower resulting in a decrease in aggregate demand. This might be set off by the subsequent lowering in property taxes that aims at stimulating investment demand in property and thus would positively influence economic output.