Fiscal policy refers to the government’s decisions about a country’s taxes and expenditures. Knowing how does fiscal policy affect the US economy helps determine the direction of the country’s growth.
Fiscal policy has the power to stabilize economic cycles. By affecting aggregate demand, it can reduce inflation and boost development. L&Y Tax Advisor further explains how does fiscal policy affect the US economy.
The Mechanics of Fiscal Policy
The two main tools used by fiscal policy are:
- Taxation
- Government expenditures
Tax reductions promote investment and consumer expenditures by increasing disposable income. In contrast, increasing government expenditures immediately stimulates the economy and raises demand.
How Does Fiscal Policy Affect the US Economy?
The fiscal multiplier is the ratio of a change in national revenue to the change in government expenditure that creates it. It is used to gauge the effectiveness of certain policies. A multiplier of more than one suggests that fiscal policy significantly affects economic production.
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Current Developments in Fiscal Policy
The US government enacted broad economic policies, including stimulus payments and higher unemployment compensation, in reaction to the COVID-19 epidemic.
These measures greatly increased the real GDP levels in 2020 and 2021. However, the stimulative effect of these policies decreased as they trailed down.
Under the Infrastructure Investment and Jobs Act of 2021, $550 billion was set aside for infrastructure projects to increase long-term economic productivity.
Similarly, the CHIPS and Science Act of 2022 allocated $280 billion to:
- Support domestic scientific research and semiconductor production
- Address supply chain risks
- Advance technology
Dangers and Obstacles
Fiscal policy has challenges even if it has the potential to stimulate economic growth. Excessive government expenditures can raise the national debt. It:
- Discourages private investment
- Raise interest rates
In addition, if fiscal growth occurs while the economy is almost at capacity, inflationary pressures could be triggered. Striking a balance between fiscal stimulus and long-term budgetary sustainability is an ongoing problem.
The Bottom Line
Comprehending how does fiscal policy affect the US economy adds more to your knowledge. It enables you to contribute mindfully in boosting your state’s monetary condition. It lessens recessions and advances long-term stability. Careful management is necessary to prevent unforeseen repercussions like inflation or unmanageable debt levels. Reactive and balanced fiscal policies will guide the US economy toward long-term success as the economic environment changes.
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