Principles of Macroeconomics
An Unpredictable Economic Future
During the last decades the economies of all the countries of the world have been undergoing expansions and recessions. The problem is that the future of the economy cannot be predicted therefore governments will have to adopt their tools and prepare to face incoming recessions. Some of the main tools are fiscal policies. What are fiscal policies? How does the government use the fiscal policies to achieve their objectives?
Every government has a budget which they use for many purposes such as to finance, stabilize the economy and encourage its development. The budget himself is calculated through the receipts (the income the government gathers through taxes mainly) and outlays (expenditure, transfer payments and debt interests that the government “invests” in). The difference between receipts and outlays is the budget balance will can be negative (deficit) or positive (surplus). Neither of them is good because if we are having surplus we will have inflation and if we are in deficit the interest rates and prices will rise so there will be less consumption.
Fiscal policies are policies adopted by the government to stabilize the economy. Fiscal policies can be either automatic or discretionary. An aoutomatic fiscal policy is automatically triggered and will stimulate demand in recession and restrain demand during expansion. The same applies for the discretionary fiscal policy, but this one has to be initiated by the government. Often the fiscal policies will have a supply side effect as taxes will discourage the people to work which will lower the potential GDP and also people will start to save more and their consumption will decrease, following a decrease in the real GDP.
