changing taxes and spending, the government conducts fiscal policy.It aims to regulate the level of activity in the economy and manage aggregate demand.If these measures are related to the legislative, the state conducted discretionary fiscal policy.Government on its performance, as a rule, the official.Discretionary fiscal policy is accompanied by changes in tax rates, transfer payments, the size of government procurement.Sufficient reason for such a move could serve as fluctuations in investment.As part of the total cost - it is the most unstable part of them, which will destabilize the situation in general.Changes in investments entail changes in employment, production volume.Increasing or decreasing taxes and spending, the government is trying to counteract this effect.This means once used by the government of Theodore Roosevelt in America.
We know that tax cuts are not having such a strong impact as increased costs.This happens because the incomes of consumers grow, but is not fully used.Some of them saved, because the maximum propensity to spend is not reaching the unit.This phenomenon is known as the balanced budget multiplier.Simple calculations allow you to see that it is equal to 1. This means that the increase in production and income corresponds to an increase of expenses of the state.This pattern can be used by governments.When they wish to stop inflation, it is enough to reduce the cost of the state and raise taxes, or do the opposite, if you need to expand the economy.It seems that it is very simple.But in practice, discretionary fiscal policy has some difficulty to use.This amount and timing problems.The first includes the amount of regulation by the state and is a force to be a possible effect.The second problem is that it is impossible to predict how many will take time lags.
World practice shows that discretionary fiscal policy is often carried out on the basis of not very accurate statistics, bringing together a stabilizing effect occurs destabilizing.
to somehow improve the situation in the country the economic situation, the following instruments of fiscal policy:
- Change programs that relate to the cost.In a period of depression that swept the country, the government primarily starts with the implementation of the public investment projects, which are aimed at overcoming unemployment.Often they are ineffective, as drawn up in a hurry, ill-conceived, only to quickly provide employment.
- Change redistributive programs such as embezzlement.Height transfers increases aggregate demand.This occurs because an increase in social benefits increases and an increase in household income.If other conditions are same, and growing consumer spending.Also, increases in subsidies allows firms to expand production.Reduction of transfer payments, on the contrary, lead to a fall in aggregate demand.
- Periodic fluctuations in the level of taxes.This instrument operates in the other direction.Raising taxes is to reduce the cost of investment and consumer spending.Consequently, the fall and aggregate demand.And, accordingly, tax reduction leads to its growth and the growth of real GNP.
In special situations, such as when a country is experiencing an economic crisis, the state introduced a stimulating fiscal policy.In this case, the government should support the proposal and aggregate demand (or at least one of these options).To this end, the state increases the amount they purchased goods and services, reduce taxes, and transfers increases as much as possible.Even the smallest of these changes lead to the fact that total output increases, and thus automatically increase and the aggregate demand.Such a result is obtained by the use of stimulative fiscal policy in most cases.
