Write 5 pages thesis on the topic fiscal policy on government purchases. The government has control over both government spending and taxation. By lowering taxes and raising its spending, the government is able to increase the amount of money available to the population and this is referred to as an expansionary fiscal policy. A situation where government increases taxes and lowers government spending thereby lowering the amount of money available to the population is referred to as contractionary fiscal policy.
Expansionary fiscal policy involves increasing funds allocated to various government agencies/ministries that then make additional consumption expenditures that stimulate aggregate production, thereby increasing the level of employment and boosting income. The overall objective of the expansionary fiscal policy is to close a recessionary gap, stimulate economic growth and decrease the unemployment rate. In a general perspective, Expansionary fiscal policy tends to increase the output, or national income, whereas contractionary fiscal policy tends to decrease the output or national income.
Keynesian economics suggests that in times of recession and low economic activity, the best way to stimulate aggregate demand is by increasing government spending and decreasing tax rates. When taxes are lowered by the government, consumers have more disposable income. This is represented in the output equation Y = C(Y – T) + I + G + NX, where Y is GDP, C is consumption, I is an investment, G is government spending and NX is net exports. A decrease in T, due to a stable Y, leads to an increase in C, and ultimately an increase in Y. By raising government spending on more goods and services, the population who are the providers of these goods and services, receive more money. .