Introduction
China’s economy has been declining and economy analysts expect the world’s second largest economy to further decline. The council has commented regarding the economic situation that China “needs more active fiscal policy” (CNBC) in order to have its economy back on the reasonable range. Fiscal policy affects aggregate demand depending on the government’s spending and taxation. Thus, if the government decides to make changes in its taxation such as discounting corporate taxes, the aggregate demand curve will shift. In addition to that, money spent on public services and welfares will increase government spending which will affect aggregate demand as well.
Economic Analysis
Fiscal Policy
“Fiscal policy is the changes in federal
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The article regarding China’s economy relates to discretionary fiscal policy specifically associated with expansionary policy. Expansionary policy is where “governments use spending and taxing powers to promote stable and sustainable growth” (Horton and El-Ganainy). Hence, China’s cabinet has planned to increase the government’s spending where “more money will be spent on public services to improve livelihoods and steady the economy” (CNBC).
Aggregate Demand and Aggregate Supply
Aggregate demand (AD) shows the “relationship between the price level and the quantity of real GDP demanded”. Whereas aggregate supply (AS) shows the “relationship between the price level and the quantity of real GDP supplied in the short run” (Hubbard and O 'Brien, 2015). Fiscal policy relates with the AD/AS model where different fiscal policies will cause the aggregate demand curve to shift differently. The ability of expansionary policy with the increase of the government’s spending is that it could increase aggregate demand and prevent it from having a negative shift. China’s cabinet has decided that it will increase its expense on public services and infrastructure constructions. Therefore, the policy that will be carry out is expansionary where based on Diagram 1, aggregate demand will increase with its curve shifting to the right from AD1 to AD2 due to increase in government spending. As a result, the will cause the market to have a
In addition, the government spending is one of the components of aggregate demand, consequently, lower GDP. In a demand-deficient recession, consumption and investment tend to decrease due to lower income and revenue, the (X-M) component tends to level off or worsen in short run, which makes government spending an essential device to stimulate the economy. Therefore a decrease in the government spending will cause an even deeper recession and a larger budget deficit.
Another form of macroeconomic policy is fiscal policy, which involves the use of the Commonwealth Government’s budget in order to achieve the Government economic objectives. By varying the amount of government spending and revenue, the government can effectively alter the level of economic activity, which in turn will influence economic growth, inflation, unemployment and the external indicators of the economy.
What is Fiscal Policy?“It refers to the central government's policy on lowering or raising taxes or increasing or decreasing public expenditure in order to stimulate or depress aggregate demand”(Bloomsbury Business Library). This means the ability
Government spending looks at the different areas the government spend money such as infrastructure (busways, trains, bridges). These decisions are made by the government and so paid for by the consumer. Government spending can be seen in China with the 1,200 square kilometre Liangjiang region in western China expected to become one of the nation's most significant development zones (Ryan, Wyatt (October 3, 2010). Imports and Exports are the commodities in which a country brings into a country (Import) and those domestic commodities that are sold to other countries (Export). Both economic drivers are crucial when increasing GDP due to their ability to strengthen the value of a countries commodity.
The fiscal policy is when the government changes its spending level and tax rates to monitor and influence their economy. The government will need to increase tax revenues to fund expenditure by increasing taxation by adjusting the income tax level.
The fiscal policy is when the government changes its spending level and tax rates to monitor and influence their economy. The government will need to increase tax revenues to fund expenditure by increasing taxation by adjusting the income tax level.
Taxation, the amount of money we pay every year and of course the government is a big spender has a lot of assets at its disposal to influence the economy. The government is a very large entity and controls a lot of money. Fiscal policy is more effective when trying to stimulate the economic growth rather than trying to slow down an economy that is overheating. The goal of fiscal policy is too accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending. Fiscal policy pros are; it can build up the operation electronic stabilizers. Well-timed fiscal stabilization together with automatic stabilizers can have an impact on the level of aggregate expenditure and activity in the economy. Fiscal policy can be picky by attempting specific category of the economy. For example, the government can be focused to concentrate education, housing, health or any specific industry area. Fiscal policy controls a spending tap. Fiscal policy can have a forceful effect if used in bankruptcy, because the government can open a spending tap to increase the level of aggregate
If the government spends a dollar on bread and then a baker uses part of that dollar to buy flour. The flour distributor uses part of that to pay the truckers. Then the original dollar of the government spending becomes in effect more than a dollar. In practice the multiplier for government spending is not very large [1]. With each dollar of government spending the GDP increases by only 1.4 dollars [1]. Government spending and taxes are not separate issues. The government can only pay off its debt and expenditures by increasing the taxes. A study [2] suggests that "an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent", a phenomenon likely caused by the fact that "investment falls sharply in response to exogenous tax increases" [2]. Thus, what seems to be a course out of recession may actually be a road into another one.
In the first part of this paper, I will discuss the effect that the expansionary fiscal policy had on the Federal government and the impact on these changes the expansionary fiscal policy when it came to taxes and Government spending. Let’s start by talking about how taxes had to have necessary changes when it came to expansionary fiscal policy. You can think of taxes as being taxes that come from consumer spending, taxes on checks or even taxes on things you own. When thinking of what taxes affect the only
Fiscal policy involves the use of government altering the levels of spending, taxation and borrowing to influence the pattern of economic activity and affect the level of growth of aggregate demand, output and employment. The main goal of fiscal policy is to stimulate economic growth, keep inflation low (target of 2%) and to stabilise economic growth. There are two types of fiscal policy. Expansionary is linked to increases in government spending to boost economic activity and contractionary which is linked to decreasing government spending to lower economic activity.
Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy—on such macroeconomic variables as GNP and unemployment and inflation.
High government intervention has also had positive effects on China’s economy. Since the Global Financial Crisis of 2007-08, China has become increasingly
First of all, expansionary fiscal policy is passed to expand the money supply of an economy to encourage economic prosperity, growth, and combat inflation. Inflation is described as the overall increase of prices in an economy or country. There are several ways an
Aggregate spending refers to consumer purchases, business and housing investment, government purchases of goods and services and exports net of imports . This is the second way to add up GDP. The Federal Reserve uses monetary policy to stimulate aggregate demand by expanding money supply and lowering interest rates, which increases households and firms’ desired spending. Expansionary fiscal policy uses changes in taxes and government spending to affect overall spending.
Increased spending on investment adds to aggregate demand and helps to restore normal levels of production and employment.Fiscal policy, on the other hand, can provide an additional tool to combat recessions and is particularly useful when the tools of monetary policy lose their effectiveness. When the government cuts taxes, it increases households’ disposable income, which encourages them to increase spending on consumption. When the government buys goods and services, it adds directly to aggregate demand. Moreover, these fiscal actions can have multiplier effects: Higher aggregate demand leads to higher incomes, which in turn induces additional consumer spending and further increases in aggregate demand.Traditional Keynesian analysis indicates that increases in government purchases are a more potent tool than decreases in taxes. When the government gives a dollar in tax cuts to a household, part of that dollar may be saved rather than spent. The part of the dollar that is saved does not contribute to the aggregate demand for goods and services. By contrast, when the government spends a dollar buying a good or service, that dollar immediately and fully adds to aggregate demand.