The Effectiveness of Fiscal Policy in Combating Economic Crisis

The article, "The Effectiveness of Fiscal Policy in Combating Economic Crisis" discussed the effects of the installation of fiscal policy to help stabilize the economy and reduce the consequences that stem from ecnomic crisis. The article talked about many concepts that we have covered in class such as consumption, GDP, taxes, investments, permanent income, the rate of interest, and business cycles. Expansionary fiscal policy is put into effect by Congress and the President and is where government expenditures are increased and taxes are decreased in order to stimulate the economy and get it back to where it needs to be when it is under producing. The article discussed how consumption is the main factor that helps to spread the fiscal multiplying effect in the economy and that it will be increased as a result of the fiscal policy that is put in place. The article stressed that a temporary decrease in taxes, as fiscal policy suggests, will cause an increase in consumption as well as an increase in GDP. When taxes are lowered, the real rate of interest (the interest that accounts for inflation and deflation) will be lower which results in long-term consumption by the people, investments made by businesses, as well as an increase in output. The article said that expansionary fiscal policy is more useful during periods of deep recessions because when people start to receive additional income, they are more likely to consume that additional sum instead of save it. On the other hand, when people have a lack of confidence in their economic representatives in times of economic crisis, they will start saving instead of consuming. When people start saving instead of consuming, a decrease in output is a result which causes the reverse effect than was intended to occur. Another factor that sometimes affects the progress of expansionary policy is when people do not consume more because they are thinking about their permanent income as opposed to the changes in the economy positively effecting consumption. Human beings always look ahead to what could come next which in turn can sometimes have a negative effect on policies that are put into place. The article talked about business cycles and how they are caused by fluctuations in the economy that reflect increasing and decreasing GDP and output. The area from the trough to the peak in a business cycle is where expansionary fiscal policy would be put into place. After it is put into place, the desired result would be to move up from that trough to make the new peak to complete the business cycle. This article was a nice parallel to many things we have learned about in class.