Fiscal policy uses government expenditure and taxation to control the economy during macroeconomic conditions. The government uses the policy to create strong and sustainable growth and reduce poverty (Bossone, 2021). During recessions, governments might consider lowering tax rates or increasing their level of expenditure to spur economic activity and encourage demand. Similarly, to fight inflation, the government might increase its rates or decrease its spending to cool the economy. The role of fiscal policy is to enable the government to support financial systems in the country, jump-start growth, and ease the impact of crises on vulnerable groups. The essay explores the history of fiscal policy and how it was created.
The fiscal policy in the United States is founded on the concepts of the British economist John Maynard Keynes. Keynes claimed that economic depressions occur because of decreased consumer expenditure and aggregate demand in businesses (Bossone, 2021). In this regard, Keynes believed that governments could stabilize business cycles and control output in the economy by regulating their expenditure and taxation rules to compensate for losses in the private sector (Bossone, 2021). After the Great Depression and the stock market crash, policymakers pushed the government to control the economy. As a result, Keynes’s arguments were advanced, challenging the old notions that economic swigs are self-corrective (Bossone, 2021). Keynes’s concepts were very significant and resulted in the creation of the fiscal policy, which required the government to increase its expenditure on public work projects and social welfare programs.
Conclusively, the paper has described the fiscal policy as government spending and taxation that influence the economy, especially during macroeconomic conditions. The essay has also examined the history of fiscal policy. It has been found that the policy is based on the ideas of British economist John Maynard Keynes that the government used to create fiscal policy after the Great Depression. Therefore, fiscal policy is vital because it helps governments reduce poverty and ensure sustainable growth.
Reference
Bossone, B. (2021). Globalization of capital, erosion of economic policy sovereignty, and the lessons from John Maynard Keynes. Review of Keynesian Economics, 9(4), 512-520. Web.