The Role of Fiscal Policy in the Economy
According to Horton & El-Ganainy (2020), Central banks use fiscal policy to influence money supply by indirectly adjusting interest rates and investment. For instance, when there is a budgetary deficit, the government increases economic activity to spur growth. That includes borrowing privately or from the public or international partners. As a result, interest rates rise, leading to reduced investment. Repayment of loans takes too much from the local economy and concentrates private investments, referred to as the crowding-out effect. Do you need urgent assignment help ? Get in touch with us at eminencepapers.com. We offer assignment help with high professionalism.
Impact of Fiscal Policy on Inflation
Inflation may occur as the government increases economic activity to increase the money supply. Accordingly, inflation occurs if an economic stimulus package puts too much money in people’s pockets that they demand more than the economy can supply. The problem is exacerbated if the economy already operated at total capacity before the stimulus. Consequently, the result is an increase in the prices of goods and services (Stupak, 2019).
Impact of Fiscal Stimulus in the Long run
Persistent fiscal stimulus has three significant negative impacts on the economy in the long run. Firstly, persistent budget deficits increase borrowing, leading to a high debt-to-GDP ratio and unsustainable debt levels. Also, constant fiscal stimulus may negatively impact long-term investment by crowding out private investors. Finally, much of the budget may be directed toward loan interest payments instead of funding more valuable projects (Stupak, 2019).
Fiscal Policy Effects on Prices and Output
The government can influence the business cycle by employing monetary policy. That is done by the central bank, which reduces interest rates. Reduced interest rates mean the cost of doing business is also reduced. The result is an increased output level and low prices.
Reflection
One key lesson from the assignment is that most governments, including advanced economies like the US, operate on debt. As long as the loans are sustainable, organizations should not fear taking them. I think loans are helpful even for bolstering personal financial health.
References
Stupak, J. M. (2019). Fiscal policy: economic effects. Congressional Research Service, Report, 1-11.
Horton, M., & El-Ganainy, A. (2020, February 24). Fiscal Policy: Taking and Giving Away. Finance & Development | F&D. https://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm
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Question 
Please note that if you edit your initial response (Original Post), you will not get credit for the Original Post. The discussions are set up as “Must post first.”
The Role of Fiscal Policy in the Economy
The Role of Fiscal Policy in the Economy
Click on the links below and Read the articles. You can also use PDF—Files with the articles posted in the Content – Week 6 – Articles for Discussion Week 6 area.
Fiscal Policy: Economic Effects
https://fas.org/sgp/crs/misc/R45723.pdf
Fiscal Policy: Taking and Giving Away by Mark Horton and Asmaa El-Ganainy
https://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm
In your initial response to the topic, you have to answer all the questions:
Discuss the effect of fiscal policy on interest rates and investment. Explain the crowding-out effect.
Discuss the impact of fiscal policy on inflation.
Discuss the impact of persistent budgetary stimulus on the economy in the long run.
Describe how fiscal policy changes affect output and prices in the economy.
Reflection – the students should also write a paragraph in the initial response in their own words, using macroeconomic terminology, reflecting specifically on the assignment and how they think they could apply what they learned in the workplace or life.