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    which best describes how expansionary policies can facilitate economic growth? they prompt decreased demand. they inspire consumer confidence. they increase disposable income. they help reduce consumer debt.

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    Fiscal Policy: Taking and Giving Away

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    Fiscal Policy: Taking and Giving Away

    FINANCE & DEVELOPMENT

    Mark Horton and Asmaa El-Ganainy

    Governments use spending and taxing powers to promote stable and sustainable growth

    It’s raining coins (photo: Matt Cardy/Getty Images)

    Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups. In the communiqué following their London summit in April 2009, leaders of the Group of 20 industrial and emerging market countries stated that they were undertaking “unprecedented and concerted fiscal expansion.” What did they mean by fiscal expansion? And, more generally, how can fiscal tools provide a boost to the world economy?

    Historically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role in the economy. More recently, countries had scaled back the size and function of government—with markets taking on an enhanced role in the allocation of goods and services—but when the global financial crisis threatened worldwide recession, many countries returned to a more active fiscal policy.

    How does fiscal policy work?

    When policymakers seek to influence the economy, they have two main tools at their disposal—monetary policy and fiscal policy. Central banks indirectly target activity by influencing the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing.

    Governments directly and indirectly influence the way resources are used in the economy. A basic equation of national income accounting that measures the output of an economy—or gross domestic product (GDP)—according to expenditures helps show how this happens:

    = + + + .

    On the left side is GDP—the value of all final goods and services produced in the economy. On the right side are the sources of aggregate spending or demand—private consumption (), private investment (), purchases of goods and services by the government (), and exports minus imports (net exports, ). This equation makes it evident that governments affect economic activity (), controlling directly and influencing , , and indirectly, through changes in taxes, transfers, and spending. Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending.

    Besides providing goods and services like public safety, highways, or primary education, fiscal policy objectives vary. In the short term, governments may focus on macroeconomic —for example, expanding spending or cutting taxes to stimulate an ailing economy, or slashing spending or raising taxes to combat rising inflation or to help reduce external vulnerabilities. In the longer term, the aim may be to foster sustainable growth or reduce poverty with actions on the to improve infrastructure or education. Although these objectives are broadly shared across countries, their relative importance differs, depending on country circumstances. In the short term, priorities may reflect the business cycle or response to a natural disaster or a spike in global food or fuel prices. In the longer term, the drivers can be development levels, demographics, or natural resource endowments. The desire to reduce poverty might lead a low-income country to tilt spending toward primary health care, whereas in an advanced economy, pension reforms might target looming long-term costs related to an aging population. In an oil-producing country, policymakers might aim to better align fiscal policy with broader macroeconomic developments by moderating procyclical spending—both by limiting bursts of spending when oil prices rise and by refraining from painful cuts when they drop.

    Response to the global crisis

    The global crisis that had its roots in the 2007 meltdown in the U.S. mortgage market is a good case study in fiscal policy. The crisis hurt economies around the globe, with financial sector difficulties and flagging confidence hitting private consumption, investment, and international trade (all of which affect output, GDP). Governments responded by trying to boost activity through two channels: automatic stabilizers and fiscal stimulus—that is, new discretionary spending or tax cuts. Stabilizers go into effect as tax revenues and expenditure levels change and do not depend on specific actions by the government. They operate in relation to the business cycle. For instance, as output slows or falls, the amount of taxes collected declines because corporate profits and taxpayers’ incomes fall, particularly under progressive tax structures where higher-income earners fall into higher-tax-rate brackets. Unemployment benefits and other social spending are also designed to rise during a downturn. These cyclical changes make fiscal policy automatically expansionary during downturns and contractionary during upturns.

    Source : www.imf.org

    Which best describes how expansionary policies can facilitate economic growth? A) They prompt decreased demand. B) They inspire consumer confidence. C) They increase disposable income. D) They help reduce consumer debt.

    Answer to: Which best describes how expansionary policies can facilitate economic growth? A) They prompt decreased demand. B) They inspire consumer...

    Economic policy

    Which best describes how expansionary policies can facilitate economic growth? A) They prompt...

    Which best describes how expansionary policies can facilitate economic growth? A) They prompt... Question:

    Which best describes how expansionary policies can facilitate economic growth?

    A) They prompt decreased demand.

    B) They inspire consumer confidence.

    C) They increase disposable income.

    D) They help reduce consumer debt.

    Economic Policies:

    Economic policies are the intervention of the government in the marketplace to deal with specific market uncertainties that arise due to changes in producer or consumer behavior. Such economic policies include monetary and fiscal, which are further classified as expansionary or contractionary.

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    The correct option is: C) They increase disposable income.

    Explanation:

    Expansionary economic policy is used to increase the aggregate demand in...

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    What is Economic Policy? - Definition & Examples

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    Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience

    This report focuses on how tax policy can aid governments in dealing with the COVID-19 crisis. The report finds that governments have taken decisive action to contain and mitigate the spread of the virus and to limit the adverse impacts on their citizens and their economies. Through various measures, countries are helping businesses stay afloat, supporting households and helping preserve employment. This readiness to act helps boost confidence. However, further action, with broader and stronger measures, is needed. Policies will need to be adapted to the evolving health and economic challenges. Containment measures may only be removed gradually, so recovery may be uneven. Where recovery is weak, fiscal action can strengthen it. In this context, multilateral collaboration will be vital for recovery and to strengthen the global economy’s resilience to future shocks. The report finds that specific support will be necessary for developing countries, including through international coordination, financial support and adaptation of tax rules that benefit all countries. Public finances will eventually need to be restored. All options should be explored, including revamping old tools, introducing new ones, and bolstering ongoing efforts to address the international tax challenges posed by the digitalisation of the economy.

    Abstract

    This report focuses on how tax policy can aid governments in dealing with the COVID-19 crisis. The report finds that governments have taken decisive action to contain and mitigate the spread of the virus and to limit the adverse impacts on their citizens and their economies. Through various measures, countries are helping businesses stay afloat, supporting households and helping preserve employment. This readiness to act helps boost confidence. However, further action, with broader and stronger measures, is needed. Policies will need to be adapted to the evolving health and economic challenges. Containment measures may only be removed gradually, so recovery may be uneven. Where recovery is weak, fiscal action can strengthen it. In this context, multilateral collaboration will be vital for recovery and to strengthen the global economy’s resilience to future shocks. The report finds that specific support will be necessary for developing countries, including through international coordination, financial support and adaptation of tax rules that benefit all countries. Public finances will eventually need to be restored. All options should be explored, including revamping old tools, introducing new ones, and bolstering ongoing efforts to address the international tax challenges posed by the digitalisation of the economy.

    Executive summary

    Decisive action has been taken to address the health and economic crises in the face of major uncertainty

    The outbreak of COVID-19 is resulting in a health crisis and a drop in economic activity that are without precedent in recent history. Containing and mitigating the spread of the virus has rightly been the first priority of public authorities, to reduce the incidence of the disease, limit the pressure on healthcare systems and prepare for a stronger rebound as mitigation measures are relaxed.

    The containment and mitigation measures have had sudden and profound economic impacts. OECD estimates suggest that the containment measures could lead to an initial decline in output between one fifth and one quarter in many economies, with consumer spending falling initially by about one third - these are rough indications that only capture the direct effects of containment in a context of very large uncertainty (OECD, 2020[1]).

    Uncertainty about the development of the pandemic and the duration of the efforts needed to contain and mitigate the virus is large. The evolution of the pandemic will also depend on ongoing efforts to expand the capacity to test, track and trace, to improve treatments for those with severe symptoms, and to develop a vaccine.

    Many countries have already acted forcefully to limit the economic hardship caused by the direct effects of containment measures. The focus of economic policy measures has been on providing liquidity support to businesses to help them stay afloat and providing income support to vulnerable households.

    Further and coordinated action to preserve economic capacity and protect the most vulnerable is needed. An escalating policy response, with broader and stronger measures, has been required to keep pace with evolving impacts and risks. Multilateral collaboration and coordination are vital to increase the effectiveness of countries’ responses at all stages of the path to recovery and strengthen the global economy’s resilience to future shocks. In this respect, the internationally coordinated G20 Action Plan to deal with COVID-19 can have large benefits, through spill-overs from joint action for the global economy.

    Policy adaptation will be key. The focus can shift from support to limit hardship and maintain economic capacity to stimulus for economic recovery as containment and mitigation measures are relaxed. This progression towards recovery will likely not be linear and smooth, however, with containment and mitigation measures removed only gradually or partially. This might increase the risks of uneven recovery.

    Specific support will be necessary for developing countries, which are facing the pandemic with weaker healthcare systems, less favourable conditions to sustain containment, larger informal economies and smaller scope for fiscal and monetary policy. These factors restrict their ability to respond to the health and economic challenges. As such, international coordination, including significant financial support and a willingness to look at how to adapt international standards and instruments to ensure benefits for low income and low capacity countries, will be needed to complement the measures they take domestically.

    Immediate measures have supported business cash-flow, household income and employment

    Many governments’ economic policy responses have been rapid and extensive. The fiscal packages so far have aimed at cushioning the immediate impact of the sudden drop in economic activity on firms and households, and to preserve countries’ productive capacity. While there are large variations in the size of fiscal packages, most are significant, and some countries have taken unprecedented action. Getting the support to where it is most urgently needed, including to small and medium-sized enterprises, nevertheless poses significant administrative challenges.

    Maintaining business cash-flow has been a core goal of the fiscal policy measures that have been introduced, supported by monetary and financial policies. Measures have included extending deadlines for tax filing, the deferral of tax payments, the provision of faster tax refunds, more generous loss offset provisions, and some tax exemptions, including from social security contributions, payroll taxes or property taxes.

    Source : www.oecd.org

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