Expansionary Economic Policy - Research Paper Example

They also contrast with the opinions held by many economists that exist within the boundaries of convectional models. Mainstream economics relies on basic theories regarding policies aimed at expanding the economy despite the downturn. There is a unanimous agreement that the continuation of the spending and tax policies may result in an unsustainable path reflecting national debt. This is mostly due to the growth of mandates that emanate from the aging population and the high costs of health care provision.

Therefore, this paper examines the evidence and logic bearing on the worth of the fiscal policy in economies severely depressed. During normal economic times, the central banks offset and disregard the effects of the fiscal policy. In turn, this keeps the policy-relevant multiplier at a constant near zero. This leaves no room for expansionary fiscal policies as a tool for the stabilization policy. But, when constraining the interest rates by the zero nominal lower bound, the discretionary fiscal policy comes into action as a vital stabilization policy technique (Jane & Thomas, 2013).

Fiscal policy is the application of taxation and government spending to influence the economy. Fiscal and monetary policies are the two major and commonly used tools available to the policy makers so as to alter output, employment and demand. When the supply of money in an economy is constant, the government expenditures have to receive financing through government spending and borrowing or imposing higher taxes. In this regard, the fiscal policy involves the government’s utilization of spending, taxing as well as borrowing policies.

The government’s budget deficit comes forth in the evaluation of the direction that the policy takes. The core economic impact of any changes in the budget affects particular groups of people for instance a tax cut for homes and families that have children raises their disposable income. Therefore, the fiscal policy discussions primarily focus on the effects of changes experienced in the financial plan on the overall financial system. This fiscal policy takes into proper use tools such as taxation, borrowing funds from populations that live abroad, consuming fiscal reserves, selling fixed assets such as land, and seigniorage that defines the benefits accrued from printing money.

The Federal Reserve System acts in accordance with satisfying its public role as an independent body within the arms of the government. It is not a private and neither is a profit making institution. The Federal Reserve acts as the central bank and takes authority from the Congress in the United States to conduct business. This part of the government holds a lot of responsibilities and this means that it is an indispensable factor in the implementation of the fiscal policy. The Federal Reserve felt that it need by a large percentage to control government spending by paying close attention to locally produced goods and services.

It was costing the government a fortune to depend solely on imported goods that come out of foreign countries and this lowered the amount of money that circulates within the U.S. This measure also meant that the government would think about trading with the foreign investors with the capacity to bring in international funds to the local companies where the local dollar becomes stronger. Controlling government expend