Government Fiscal Policies: Goals and Influence

Instructor: Christine Serva

Christine has an M.A. in American Studies. She is an instructional designer, educator, and writer with a particular interest in the social sciences and American studies.

In this lesson, you'll learn about the measures used to determine the health of the economy, including the goals of a fiscal policy. You'll also also learn about some basic approaches the government uses to help stimulate a struggling economy.

Health of the Economy

Let's imagine you're at the doctor's office for a visit. Someone takes your temperature, your pulse rate and your blood pressure, all indicators of how well you are doing. While health practitioners use thermometers and blood pressure machines to determine your physical health, economists use employment, inflation and production rates to determine economic health and fiscal policy. And instead of a nutrition plan or prescription, they sometimes address economic issues through taxes and spending.

Why Fiscal Policy?

The term fiscal policy refers to the ways in which the government keeps the economy healthy. In the same way your doctor provides you with recommendations for healthy living, the government tries to determine what's best for the economy. Like the common cold, some economic ups and downs aren't always a major concern. However, a consistently poor economic performance can lead to a cycle, such as a recession or depression.

A recession is a decrease in economic activity that lasts more than a couple of months. In its most extreme form, a recession that goes on for more than two years can lead to a depression. Characteristics of a depression include bankruptcies, decreases in commerce and trade, high unemployment rates and less available credit, among other factors. For example, the Great Depression that affected the United States and most of the Western world lasted from 1929-1939.

Unemployment rates were sky-high during the Great Depression.
A line outside a depression-era soup kitchen for the unemployed

Goals of Fiscal Policy

The three major goals of fiscal policy and signs of a healthy economy include inflation rate, full employment and economic growth as measured by the gross domestic product (GDP). Let's take a look at the individual goals.

The inflation rate refers to the rise in costs for goods and services in relation to decreases in purchasing power. For example, if the rate of inflation is 3%, than your $2.00 morning cup of coffee will cost you $2.06 in a year. In most countries, central banks try to maintain an inflation rate of no more than 3%.

Secondly, a healthy economy will have a low unemployment rate, also described as full employment. This means, if you need a job, you'll be most likely able to find one.

The third indicator of a healthy economy is economic growth as measured by the gross domestic product (GDP). The GDP reflects the monetary value of all the goods produced and services offered in a country during a particular period, and ideally, it's increasing at a steady, stable rate.

Taxes and Spending

Some economic issues, like serious illnesses, need more extensive government attention, such as a recession that's unlikely to resolve itself. In this case, legislators can adjust taxes or government spending. Either can be increased or decreased, depending on what's expected to happen as a result.

When the government makes a change to increase or decrease taxes, the change can affect your tax return. For example, stimulus efforts might lead to a tax rebate, which the government hopes you'll spend and help stimulate the economy.

The government may also change its spending habits, like how much money it spends on the military or education. Decreased spending may result in lower inflation rates, while increased spending might reduce unemployment. For example, during the Great Depression, President Franklin Roosevelt's New Deal program used building, roadwork and other projects to put people back to work.

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