Answer to Question #328071 in Macroeconomics for Macroeconomics

Question

What factors determine the effectiveness of discretionary fiscal policy?

Answer 1

The effectiveness of fiscal policy is largely dependent on the balance between taxation and spending. Governments tax their citizens in order to fund government projects and to redistribute wealth in order to best suit the needs of all affected individuals. Decreasing taxes for certain groups gives people more money to spend, which can, in some cases, improve a country's economy by increasing consumer demand. Government spending can be combined with reduced taxation in order to stimulate the economy. It is often used to provide jobs and money, with the expectation that people will then spend more money, thereby helping the economy.