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Fiscal Policy and the Economy

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Describe fiscal policy and how it relates to todays economy (in your own words and with references). I need to understand it better and right now I am having a hard time applying/relating it to todays economy. These are some questions I have in my book as practice questions that I do not understand. I have the answers but the book does not elaborate, please elaborate on how you came to your conclusions.

The White House estimated in August 25, 2009 that the estimated 2009 federal deficit will be $1.58 trillion. This is 11.2% of GDP, the highest in all history.

Is this bad or good for the economy today and the next 10 years?
What is the history of fiscal deficits in the U.S.?
What are the lessons of past fiscal deficits that we may apply today?

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Solution Summary

Fiscal policy is a a tool utilized by the government to influence the country's economic condition, without changing the money supply available in circulation. Two basic fiscal policy tools include government spending and taxation. While they are solutions to economic problems, the government must make sure that they are appropriately and effectively implemented.

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What is fiscal policy?
Fiscal policy is a government tool that aims at influencing the country's economic condition, without changing the money supply available in circulation. Fiscal policy tools include government spending and taxation. A twin policy, the monetary policy, has the same aim but it is done through changing the money supply available in circulation. Both are basically solutions of the government to inflation and both are ways to influence economic conditions.

How does fiscal policy affect the economy?
Fiscal policy is a critical decision to make. The tools should be applied in a timely manner and, only when the economy calls for it.
In a situation of a general weakening economy, purchases or aggregate demand for goods and services are going down, prompting businesses to either slow down or retain their level of operations ( no provisions for growth). These result to decisions of owners of business not further expand their operations ( or even cut down their operations), cut down on their investments, not to hire more workers, and the worse is others ...

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  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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