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What Is the Connection between Macroeconomics and Fiscal Policy?

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  • Written By: Erik J.J. Goserud
  • Edited By: PJP Schroeder
  • Last Modified Date: 23 September 2016
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Economics is the study of decision making, often related to monetary issues that affect everyone worldwide. This science may be viewed from an individual's standpoint, which is referred to as microeconomics, or from the broader perspective of a group or entire economy, as in the case of macroeconomics. Macroeconomics is affected by a multitude of factors that are not always understood, even by experts. Macroeconomics and fiscal policy are intertwined in a logical sense, with policy makers directly affecting the economy through changes in the way government regulates industry.

Fiscal policy can be defined as the use of taxation and government expenditure to influence the economy. If the government is viewed as a business, taxation would be the revenue as collected from the taxpayers, whereas the expenses would be expenditures on programs and services. Tax rates and expenditures are varied based on current policy, so it is easy to see how macroeconomics and fiscal policy are related.

The other primary way in which the economy is altered is through monetary policy. Macroeconomics and fiscal policy are related similarly to the manner in which macroeconomics and monetary policy are linked. One difference, however, is that monetary policy seeks change through adjustments in interest rates and the money supply, whereas fiscal policy is strictly expenditure and tax based.

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There are three primary ways in which macroeconomics and fiscal policy are related. The three outlooks for fiscal policy are expansionary, neutral, and contractionary. Expansionary policy attempts to expand the economy through expenditures that exceed revenue, or taxes. Although this may be effective for furthering a nation's economy, it is at the risk of future debt and oftentimes relies on unproven hypothetical measures. The more conservative route of contractionary policy focuses on collecting more money than is spent, hence decreasing federal debt at the risk of causing economic stagnancy.

The neutral stand of macroeconomics and fiscal policy is when expenditures and tax revenues are equal. There are inevitably differences between the two, however, making this state rather unattainable outside of theory. Many laws, policies, and regulations rely on the government to put into place the fiscal and monetary policies that affect the economy and each individual within it. It is therefore important for the average citizen to remain educated on such issues so that they can vote into office the representatives they feel will do the best job toward improving the economy.

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