by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How can Fiscal Policy Affect Trade Imbalances? If a nation is experiencing the inflow of foreign investment capital associated with a trade deficit because foreign investors are making long term direct investments in firms, there may be no substantial reason for...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are the risks of chronic large deficits in the United States? If a government runs large budget deficits for a sustained period of time, what can go wrong? According to a recent Brookings Institution report, a key risk of a large budget deficit is that government...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How do Exchange Rates Affect Budget and Trade Deficits? Exchange rates can also help to explain why budget deficits are linked to trade deficits. International financial investors, as a group, will demand more U.S. dollars on foreign exchange markets to purchase the...
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...
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...
