Economics

Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, which states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money.

Fiscal policies are decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. When the government changes tax laws, they can effectively modify the amount of disposal income available to its taxpayers. For example, if the government were to increase taxes, consumers would then have less disposable income and in turn would have less money available to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.

Before the Great Depression in the United States, the government's approach to the economy was laissez fair. But following the Second World War, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mixture of both monetary and fiscal policies (depending on the political orientations and the philosophies of those in power at a particular time, one policy may...