Fiscal Policy

1. Pro-Fiscal Stimulus – expansionary fiscal policy is beneficial because:
• Increased government expenditures and/or reduced taxes will stimulate aggregate demand and boost incomes as it will increase confidence of consumers and investors.
• That will lead to an increase in output followed by an increase in national income and reduced unemployment.
• Resulting economic growth will have a healing effect on economies experiencing recession and will lead to a decrease in national debt levels.
• Currently being undertaken by the US government with measures aimed at preventing sharp declines in demand in the short run and adding confidence by controlling factors that increase budget deficits.
2. Anti-Fiscal Stimulus – Governments should tighten their budget because:
• Future Indebtedness:   Stimulus measures increase Government borrowing and budget deficits.  
• Investment Credibility: Large deficits threaten long-term fiscal credibility.
• Consumer spending will not increase:   consumers anticipate that the government will implement tax increases to pay off public debt in the future and therefore save money instead of spending it.
• Crowding out if investment: If the private sector lends money to government they will not have these funds to invest.
• Output or unemployment is not stimulated: increased government borrowing will increase interest rate, thus, reduce investment and net exports. Therefore, the deficit caused by fiscal stimulus may limit increases in output and employment.
3. Do you think the debate is entirely “objective” in an economic sense; if not, why not?
The debate is not “objective” as each side’s argument rests upon their fundamental economic beliefs. For example, neo-classical economists and Keynesians believe that fiscal measures introduced by the government will stimulate demand and a multiplier effect will boost the overall economy by more than the initial stimulus, thereby spending will actually reduce a budget deficit. Ben...