Government can stimulate long-term growth by spending more on infrastructure and public service which has the effect of putting more money in the system. When there is more money in the system by purchase and the salaries paid to workers, these workers who are recipient of government spending will have more money to buy goods. This has a “ripple” effect to stimulate the economy because one man’s spending is another man’s income resulting to an economic growth.
Government can also stimulate long-term growth by lowering the taxes it impose. When taxes are lower, business are able to save money which used to be paid for taxes. This money can then be used for reinvestment and expansion of the operation of business. When the business expands, it meant that it has to hire more people and buy more materials. When more people are employed and more purchases made, people will have more money in their pockets to buy goods which stimulates a long term economic growth.
The government’s fiscal policy was recently used by the Obama government to save the United States from the late 2008 financial crisis.