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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 ...
A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of 2010. [5] [6] This stimulus, equivalent to US$586 billion, represented a pledge comparable to that subsequently announced by the United States, but which came from an economy only one third the size. [7]
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 ...
In fiscal year 2005, the deficit began to shrink due to a sharp increase in tax revenue. By 2007, the deficit was reduced to $161 billion; less than half of what it was in 2004 and the budget appeared well on its way to balance once again. Fiscal policy is the application of taxation and government spending to influence economic performance.
An IMF working paper [4] by Guajardo, Leigh, and Pescatori [5] published in Journal of the European Economic Association on Expansionary Austerity and the Expansionary Fiscal Contraction hypothesis that examined changes in policy designed to reduce deficits found that austerity had contractionary effects on private domestic demand and GDP.
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.
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.