8 - Fiscal Policy

Abstract

This chapter describes fiscal policies as governmental activities involving spending, taxation, and transfer payments. Government spending affects aggregate demand directly and generates high induced consumption spending. The total impact of a change in government spending is given by the spending multiplier. Taxation and transfer payments affect the economy indirectly. These policies affect disposable income with the effect of altering consumption spending. They also have multiplier impacts on aggregate demand. A number of factors influence the effectiveness of fiscal policies. The type of aggregate supply curve that the economy faces is one such variable. Depending upon the state of aggregate supply, a given increase in government spending can have a large affect on real gross national product, cause large increases in the price level, or be divided between higher prices and increased production. Other factors are also important. Tax policies can succeed or fail depending upon whether they are viewed as permanent or not by taxpayers.