Fiscal policy is the adjustment of spending levels made by the government to check and control its country’s financial system. It’s a means by which a monetary policy, in conjunction with the central bank, controls the supply of money of a nation. Both policies are combined in order to guide a country towards achieving its economic goals. Fiscal policy basically enables governments to run the productivity of macro economy through increase or decrease of taxation levels and public expenditure. This way, inflation is prevented, employment opportunities are created and a healthy value of money is maintained. The main idea is to maintain a balanced economy for all. For example, in the case of a declining economy, unemployment increases which leads to low purchasing power of consumers resulting to low profits in businesses. A government therefore stabilizes the economy by decreasing taxation to control prices and creates job opportunities which would increase demand by consumers as well as money making by businessmen (Wessels, 2006, p. 113).
The multiplier effect
Multiplier effect describes a country’s increase in supply of money resulting from banks that are able to lend. Its size is determined by the amount of deposits required as reserves by the banks. It is simply the money that is used to make more money and it is calculated by summing up the bank deposits and dividing it by the amount required as reserve. After keeping aside the reserve percentage, the remaining amount can be loaned to customers who may further deposit it into another bank which in turn keeps the reserve amount and lends the rest. This cycle continues as more customers deposit money and banks keep lending it until the deposits increases five times the initial amount. A high reserve requirement means the supply of money will increase which results in creation of more money (Wessels, 2006, p. 79).
Full employment explains a condition where all available resources of labor are being utilized most efficiently. It entails both skilled and unskilled personnel that can be employed within a given time. Full employment can be attained in any economy although there is the risk of inflation which may result from workers getting more income which would in return, result in an increase in prices. Literally, full employment means no unemployment although there is always the acceptable rate of unemployment which forms a small part of the workforce that is unable to get work. Full employment may also be described as the realization of an ultimate unemployment rate where the types of unemployment that exist are fictional (Wessels, 2006, p. 137). This means that workers will only be temporarily unemployed as they search for new jobs.
Automatic stabilizers are programs that automatically control current economic trends without help from the government. They assist to counter certain activities in the business cycle that pose a threat to the national economy. They work by adjusting expenditures made by the government when there is need for change in the business sector. Automatic stabilizers do not require the intervention of the government to pass new laws or bills in order to attain the desired goals through a governing body. This response ensures immediate adjustments to any current economic condition whenever necessary without having to wait for the very long procedures of obtaining authority to transfer money by the government. Although they do not prevent extreme changes in the economy, they prevent minor shifts that would, otherwise, affect the economy (Wessels, 2006, p. 123).
Wessels, W. (2006). Economics. New York. Wadsworth Publishers.