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Macroeconomic Theory and Applications
Deloris Evans
Jones International University
January 15, 2013

Abstract I wanted to focus more on fiscal policy which is the use of government spending and taxation that is used to influence the economy. How it causes tax cuts, inflation, unemployment and even a issues about the debt ceiling that is an undergoing debate in the white house today.

Fiscal Policy Fiscal policy is a very important tool which is used for managing the economy because of its ability to affect the total amount of output produced or known as GDP. When the government purchases goods and services, collects taxes, distributes payments, it is engaging in fiscal policy. It is said that “the primary economic impact of any change in government budget is felt by particular groups.” (Weil) For example, this group could be a family that would receive a tax cut which would help to raise their disposable income and may affect the aggregate level of output.
However, the focus of fiscal policy is mainly on the effect of change in the government budget on the overall economy and it is usually used to describe the effect on the aggregate economy regarding the overall levels of spending and taxation, and predominantly, the gap between.
The first impact of a fiscal expansion is to raise the demand for goods and services. We know that a greater demand causes an increase in both output and prices. The higher demand increases the output and prices will deepen, which in turn, is better for the business cycle. If the economy is in a recession, than the unused productive capacity and unemployed workers would then cause an increase in demand that will lead mostly to more output and possibly without changing the price level or lowering the price levels. However, if the economy is doing well and employment is high, by contrast, a fiscal expansion will have more

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