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Two lines represent a country's respective internal (employment vs. unemployment) and external (current account deficit vs. current account surplus) balance with the axes representing relative domestic costs and the country's fiscal deficit. The diagram is used to evaluate the changes to the economy that result from policies that either affect ...
Government spending can be a useful economic policy tool for governments. Fiscal policy can be defined as the use of government spending and/or taxation as a mechanism to influence an economy. [13] [14] There are two types of fiscal policy: expansionary fiscal policy, and contractionary fiscal policy. Expansionary fiscal policy is an increase ...
The concept is often encountered in the context of a government's approach to spending and taxation. A 'procyclical fiscal policy' can be summarised simply as governments choosing to increase government spending and reduce taxes during an economic expansion, but reduce spending and increase taxes during a recession.
A 2009 study of the 1983–1986 Denmark fiscal contraction applied structural VAR/event study methodology to test the EFC hypothesis. This study concluded that the Danish fiscal contraction had not hurt economic expansion, that the EFC hypothesis may work but only for large and credible fiscal consolidations, and that other reforms may have also played an important role.
One type frequently discussed is when expansionary fiscal policy reduces investment spending by the private sector. The government spending is "crowding out" investment because it is demanding more loanable funds and thus causing increased interest rates and therefore reducing investment spending.
Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective, especially in a liquidity trap where, they argue, crowding out is minimal. [8] In the classical view, expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income. When ...
As popularized by supply-side economist Arthur Laffer, the curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. However, the shape of the curve is uncertain and disputed among economists.
The study has mostly shown the uncertainty about fiscal policies. The study has shown the large differences between the low and high estimates of the multipliers effect of tax cuts. On the other hand, the study indicated that government spending is a more reliable form of fiscal policy than tax cuts. [36]