**📅 Date:** ➤ ⌈ [[2025-02-16-Sun〚Temporal Compression ▪Fiscal Policy〛]]⌋ **💭 Note:** ➤ Fiscal & monetary policy often work together, but excessive fiscal expansion can **reduce the effectiveness of monetary policy** (e.g., leading to inflation that forces interest rate hikes). ➤Fiscal policy is the government’s tool to influence the economy through spending & taxation. ➤ fiscal multipliers, debt sustainability, and automatic stabilizers ⇩ 🅻🅸🅽🅺🆂 ⇩ **🏷️ Tags**: #💰/Noun **🗂 Menu**: ⌈[[✢ M O C ➣ 02 ⌈F E B - 2 0 2 5⌉ ✢|2025-F E B-MOC]]⌋ ➤ ⌈[[The History of Welfare Development in the UK]]⌋ ➤ ⌈[[Econ 011- Monetary & Fiscal Policy]]⌋ **📑 PDF**： **🌐 Link**: --- ![[Screenshot 2025-02-16 at 23.07.44.png]] ---   ## What is Fiscal Policy? >Fiscal Policy refers to the **government's use of taxation and spending** to influence the economy. It is one of the **two primary macroeconomic tools** (alongside **Monetary Policy**) used to **stabilize economic fluctuations**. ### 📌 Key Objectives: - **Stabilize the economy** (reduce volatility in GDP growth) - **Promote economic growth** (increase productivity & investment) - **Manage inflation** (prevent excessive price increases) - **Reduce unemployment** (stimulate job creation) - **Influence aggregate demand** (adjust spending and taxation to control demand in the economy) --- ## I. Fiscal Policy Components - There are **two primary tools** of fiscal policy: ### 1. Government Spending - ✔ **Types of Government Expenditure**: - **Infrastructure investment** (roads, bridges, energy projects) - **Public services** (healthcare, education, defense) - **Welfare programs** (unemployment benefits, social security) - 💡 Spending increases ==aggregate demand== (AD总需求) directly, stimulating growth during recessions. --- ### 2. Taxation - ✔ **Types of Taxes**: - **Direct taxes** (income tax, corporate tax) - **Indirect taxes** (sales tax, VAT) - 💡 ==Lower taxes increase disposable income==(可支配收入), boosting consumption & investment. --- ## II. Expansionary vs. Contractionary Fiscal Policy ### 📌 Expansionary Fiscal Policy (Used During Recessions) - **Increases government spending** - **Lowers taxes** - **Boosts aggregate demand (AD ↑) → Leads to higher GDP & lower unemployment** - ❌ **Risk**: Can **increase inflation & budget deficits** ### 📌 Contractionary Fiscal Policy (Used to Cool an Overheated Economy) - **Decreases government spending** - **Raises taxes** - **Reduces aggregate demand (AD ↓) → Slows inflation & reduces budget deficits** - ❌**Risk**: Can **slow economic growth & increase unemployment** --- ## III. Fiscal Policy & Mankiw’s Principles of Economics 📖 Mankiw’s **Principles of Economics** outline **key insights on fiscal policy**: - 1️⃣ **Government can sometimes improve economic outcomes.** - Fiscal policy is a tool for **correcting market failures and stabilizing the economy**. - 2️⃣ **The cost of government intervention**: - Increased spending may lead to **higher debt & deficits**. - **Taxation policies impact incentives** for work and investment. - 3️⃣ **The Multiplier Effect**: - **A $1 increase in government spending can generate more than $1 in GDP growth** (due to the **circular flow of income**). - **Spending multipliers vary** (e.g., infrastructure projects may have a **higher multiplier** than tax cuts). - 4️⃣ **Crowding Out Effect**: （挤出效应） - **Large government borrowing can drive up interest rates**, discouraging private investment. - Fiscal expansion may lead to **higher bond yields** and increased debt servicing costs. - 5️⃣ **Ricardian Equivalence**: （李嘉图等价理论） - If people **expect future tax increases** to pay for government deficits, they may **reduce spending today**, neutralizing fiscal stimulus effects. --- ## 💡 focus ### 📌 Overview - ✔ **Understanding fiscal multipliers** (impact of government spending & tax changes on GDP) - ✔ **Debt sustainability & fiscal deficits** - ✔ **Policy trade-offs between inflation control and growth** - ✔ **How fiscal policy interacts with monetary policy** (coordination between central banks & governments) ### 📌 Concepts to Remember ##### 1️⃣ **Deficit vs. Surplus** - **Budget Deficit**: When **government spending exceeds tax revenue**. - **Budget Surplus**: When **government revenue exceeds spending**. ##### 2️⃣ **Automatic Stabilizers** - **Built-in fiscal mechanisms** that automatically **adjust government spending & taxation** to stabilize the economy (e.g., unemployment benefits, progressive tax systems). ##### 3️⃣ **Discretionary Fiscal Policy** - **Deliberate government actions** to adjust spending and taxation (e.g., stimulus packages, tax cuts). --- ## 6️⃣ Fiscal Policy vs. Monetary Policy | **Feature** | **Fiscal Policy** 🏛️ | **Monetary Policy** 💰 | |---------------------|-----------------|-----------------| | **Who Controls It?** | Government (Ministry of Finance/Treasury) | Central Bank | | **Main Tools** | Government Spending & Taxation | Interest Rates, Open Market Operations (OMO) | | **Main Objective** | **GDP Growth, Employment, Inflation Management** | **Price Stability, Interest Rate Control, Economic Growth** | | **Implementation Speed** | **Slower (requires political approval)** | **Faster (central bank decisions are independent)** | | **Effectiveness** | **Can be powerful but may lead to higher debt** | **More flexible but limited by interest rate constraints** | --- ## 🌰 Real-World Examples ##### 📌 **2008 Financial Crisis → Expansionary Fiscal Policy** - ✔ Massive **government spending programs** (e.g., US **TARP program**) - ✔ **Tax cuts to stimulate demand** ##### 📌 **COVID-19 Pandemic → Expansionary Fiscal & Monetary Policy** - ✔ **Stimulus checks & business support** - ✔ **Central banks lowered interest rates & conducted QE** ##### 📌 **Japan’s Deflation & Fiscal Challenges** - ✔ **Quantitative easing (QE) + fiscal stimulus** - ✔ **Struggles with long-term low inflation & high debt**