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Fiscal Policy and Trade Balances

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

How does Fiscal Policy Affects Trade Balances? Government budget balances can affect the trade balance. A net inflow of foreign financial investment always accompanies a trade deficit, while a net outflow of financial investment always accompanies a trade surplus. One...

Fiscal Policy Affects Interest Rates

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

How Does Fiscal Policy Affect Interest Rates?  Because fiscal policy affects the quantity that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. In the chart below, the original equilibrium...

Temporary and Permanent Fiscal Policy

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What is Temporary and Permanent Fiscal Policy? A temporary tax cut or spending increase will explicitly last only for a year or two, and then revert to its original level. A permanent tax cut or spending increase is expected to stay in place for the foreseeable...

Types of Lag in Fiscal Policy

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

How do the Effects of Fiscal Policy Lag?  The government can change monetary policy several times each year, but it takes much longer to enact fiscal policy. Imagine that the economy starts to slow down. It often takes some months before the economic statistics signal...

Government Borrowing

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What is Government Borrowing?When governments are borrowers in financial markets, there are three possible sources for the funds from a macroeconomic point of view: (1) households might save more; (2) private firms might borrow less; and (3) the additional funds for...
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