Fiscal+Policy


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Fundamental Questions ** > Fiscal policy can eliminate a GDP gap by increasing government spending (which directly increases aggregate demand) or by decreasing taxes (which increases consumption). The changes in government spending and taxes have a multiplier effect on income. > Government spending has increased from 3 percent of the GDP before the Great Depression to approximately 18 percent of the GDP in 2000. > Budget deficits can be harmful to the economy. If the deficit is financed by borrowing, interest rates may be driven up and private domestic investment may be crowded out. Higher interest rates make U.S. financial instruments attractive to foreigners, and the resulting increase in the demand for dollars may cause the dollar to appreciate. The appreciation of the dollar decreases net exports. Greater interest costs as a result of the deficit may decrease national wealth if the debt is held by foreign residents, and the debt did not increase investment and productive capacity in the United States. > Industrial countries spend more of their budgets on social programs than do developing countries and they depend more on direct taxes and less on indirect taxes as sources of revenue. Developing countries rely more on government than the private sector to build their infrastructure and for investment spending. Industrial countries rely on direct taxes on individuals and firms, while developing countries use indirect taxes on goods and services.
 * 1) **How can fiscal policy eliminate a GDP gap?**
 * 1) **How has U.S. fiscal policy changed over time?**
 * 1) **What are the effects of budget deficits?**
 * 1) **How does fiscal policy differ across countries?**