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Description Fiscal policy is a tool that is used by government through which it adjusts its spending levels and tax rates to regulate and influence a nation’s economy. It compliments monetary policy in which a central bank influences a nation’s money supply. These policies are used to achieve country’s economic goals. In order to understand what fiscal policy is and its implication, we need to see how it actually works. How Fiscal Policy Works Fiscal policy is founded on the theories of Keynesian economics. According to this theory governments can adjust macroeconomic productivity levels of an economy by increasing or decreasing tax rates and public spending. This is the reason for decreasing inflation; increases rate of employment and keep a good money value. Fiscal policy is crucial to an economy. For instance, in 2012 people thought that the fiscal cliff, a large increase in tax levels and reduction in government spending stated for January 2013, would cause recession gain in the U.S. but the U.S. Congress evaded this by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013. Balancing Act The basic idea here is to make a balance between tax rates and public spending. For instance, when there’s increase in public spending or decrease in taxes runs, there is a risk for rising inflation. This is mainly due to the fact that increased money amount in an economy. When there is less tax level in an economy and more liquidity, the demand increases. This makes business run and turns the business cycle active. But we must consider if there is no control over the money supply, it will increase liquidity in the market. This will cause a decrease in value of money and increase the general prices of the products causing high inflation. Thus, a balancing fiscal policy is imperative to run an economy smoothly. The fiscal policy needs to be monitored closely and consistently. The changes should be made whenever and wherever necessary. Conclusion Dealing with the fiscal policy, the biggest impediment that is being faced by policymakers is evaluating that to what extent the government involvement should be in the economy. According to fiscal policy archives of the world, there have been various degrees of government interference in different countries’ economies. But the usual consensus is that a certain degree of government interference is needed to maintain a healthy economy. Reference: http://www.researchomatic.com/Fiscal-Policy-37852.html
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