Expansionary fiscal policy
The fiscal policy serves as a tool to counter the fluctuations in the economy. This is a government's plan of taxation and spending. Through the price cuts, the government will be able to increase on its spending of programs such as education and healthcare, which are the backbones of the improved economy. The fiscal expansionary fiscal policy increases the demand of goods and services. The cutting of taxes means that the consumers will have more disposable income; hence; they have the capacity to spend on goods and services. The companies on the other hand, are able to generate more revenues which enables them expand their business and employ more workers. The fiscal policy increases the consumer spending which ultimately leads to the improved economy. The tax cuts leads to the improved lifestyles of the poor and the middle class in the society.
Discretionary fiscal policy
the discretionary government spending and the tax cuts, assists in filling the recessionary gap and the inflationary gap. Tax cuts counter the recession. This facilitates the increase cash transfer payments for instance the unemployment insurance benefits. The government's purchase of goods and services such as the construction of the public works is increased. The discretionary policy improves the economy by increasing the aggregate demands during the recessions while restraining it during the booming times. The discretionary policy alleviates the increase in inflation whilst accelerating the declines in the economy in the event that the economy slows down.
the tax multipliers determine the amounts by which the government adjusts its taxes. With regard to the demands of the economic stakeholders of a nation, tax cuts enhance the economic growth the performance of an economy. The miscalculation of the multiplier may botch the economy; the economists therefore, should calculate the value of the taxes. The economists should compute the tax multipliers basing on the consumers' willingness to consume. The willingness of the consumers should is measured by the marginal propensity to consume.
The improved economy occurs since the determinations of the additional dollars of income spend by the consumers on goods and services based on MPC. In order to determine the trend of the economy, the multiplier is determined by considering the change in national income because of the change in the tax policy. The multiplier for the government spending is also determined by taking into consideration the government increase in purchases with respect to the increased output and the national income. This leads to dramatic improvement of the economy.
The tax cuts stimulate the economy just like the government spending by increasing the aggregate demand. It is important to note that the tax, cuts not only increases the aggregate demands but also increases the return to the productive efforts and risk taking. The aggregate demand increases the consumer spending. The tax cuts increases the consumption and therefore, the increase in demand. The aggregate demand therefore, fosters the economic growth since it encourages the consumer spending and thus the rise in aggregate demand.