Reduced rates of corporation tax can also stimulate fixed capital investment. This will in turn boot supply due to increased supply of goods and services. In addition, establishment of infrastructures is a part of the government’s spending and budget. Increased taxation can also promote production of goods and services within the country. This is an unprecedented impact of fiscal policies.
How do automatic stabilizers differ from discretionary fiscal policy tools?
Automatic stabilizers increases or decreases the budget deficits during times of recessions and booms respectively. They are either expense or taxation items that forms as economic system. On the other hand, discretionary fiscal policy tools require legislative action and can take long time to implement. Ideally, fiscal policy will be used to increase aggregate demand during recessions and to restrain aggregate demand during boom times (McEachern, 2012). Automatic stabilizers include unemployment compensation subsidies to farmers and a progressive tax system. Unlike discretionary fiscal policy tools, automatic stabilizers do not suffer from economic lags. Lastly, Automatic stabilizers do not require government approval in order to take effect. Consequently, discretionary fiscal policy requires Congress or the President approval. ...
Increased borrowing by the government leads to higher interest rates due to increased demand for money and loanable funds. Thus crowding out restrict or discourages private sector investments.
Consequently, the government becomes a supplier of essential services previously provided by the private sector. Crowding in and crowding out also have different implication on autonomous expenditure and IS curve. For instance crowding in causes the IS curve to shift outwards due to increase in transaction and demand for liquid cash. Question 4: What problems are associated with the U.S. federal budget process? What solutions have been offered to these problems? The current US federal budget fails to meet key budgetary requirements. Ideally, the budget is supposed to provide a realistic and orderly roadmap for the country’s annual spending against available income. However, it stifles debate and prevents cooperation hence creating a breakdown in the national economy and allocation of funds. The current system has been subject of abuse and a source of loopholes for lawmakers eager to exploit its structural flaws. In addition, the national budget is subject to political process, making it difficult to implement proposed economical progress (Bade, & Michael, 2002). For instance, in 2005 the Senate and the White House could not concur even on essential budgetary structure. Moreover, the budget process is designed with a bias toward higher expenditure and taxes. In order to solve these problems, several solutions have been proposed. Firstly, compulsory expenditure should be accounted for in the annual allocations. Lastly, the Congress should establish an emergency reserve fund for rapid response (Bade, & Michael, 2002). Question 5: It is often