by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How Do Politics Affects Discretionary Fiscal Policy? A final problem for discretionary fiscal policy arises out of the difficulties of explaining to politicians how countercyclical fiscal policy that runs against the tide of the business cycle should work. Some...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are the Limitations of Fiscal Policy? Fiscal policy can help an economy that is producing below its potential GDP to expand aggregate demand so that it produces closer to potential GDP, thus lowering unemployment. However, fiscal policy cannot help an economy...
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...
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...
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...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Fiscal Policy Affect the Aggregate Supply and Demand Curve? The result of this is regular shifts to the right of the aggregate supply curves. The original equilibrium occurs at E0, the intersection of aggregate demand curve AD0 and aggregate supply curve...
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...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Discretionary 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...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Government Spending? Government spending covers a range of services that the federal, state, and local governments provide. What is a Budget Deficit and Surplus? When the federal government spends more money than it receives in taxes in a given year, it runs a...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are Keynesian vs Neoclassical Macroeconomic Policy Recommendations? Let’s summarize what neoclassical economists recommend for macroeconomic policy. Neoclassical economists do not believe in “fine tuning” the economy. They believe that a stable economic...
