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Fiscal Policy and Monetary Policy

Essay 1.) Describe the process of fiscal policy including alternative types and the ramifications/efficiency of its use.

Essay 2.) Describe the process of monetary policy including its relation to interest rates, the money supply, and fiscal policy.

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Essay 1.) Describe the process of fiscal policy including alternative types and the ramifications/efficiency of its use.

Fiscal policy refers to the government policy that endeavors to affect the economy through alterations in government taxes or through changes in government spending. For example the changes in the level and composition of taxation and government spending affect the economy through influencing the distribution of income, the methods of resource allocation and changing the overall economic activity of the country.
There are three type of fiscal policies. The first is an expansionary fiscal policy. In this policy the net government spending is positive. In other words it means that government spending is higher than taxes. This type of policy is implemented either through an increase in government spending or a reduction in taxation. The second type of fiscal policy is the contractionary policy in which the net government spending is negative. This type of government policy is implemented through an increased taxation strategy, reduced government spending or an amalgam of these strategies. The effect is that there is either a lower budgetary deficit or an increase in budgetary surplus.
The third type of fiscal policy is a balanced budget policy in which the government spending is equal to tax revenues. The taxes fully finance the government spending. The budget of this type has a neutral effect on the level and direction of economic activity.

Keynesian economics says that changing the government spending and tax rates is the best way of stimulating aggregate demand. This method is supposed to work during times of recession or low economic activity as an important tool to stimulate strong ...

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