Fiscal policy involves budgetary measures in which the government carries through a deficit budget in order to stimulate the economy by charging lower corporate taxes. In other words fiscal revenue in the given fiscal year will be less than government expenditure on projects. These projects are naturalluy intended to stimulate spending and subsequent economic growth (Ertl, 2008). When the government spends more than what it collects by way of taxes, especially business taxes, more money would be left in the hands of the people and businesses to spend or/and save. When such money comes into circulation the economy gets a boost.
Fiscal stimulus programs are intended to solve the problem of persistent unemployment and underemployment in the economy through government spending. However they don't always produce the desired outcomes. For instance representative agent models in varying degrees point out to the fact that the outcomes of such fiscal stimulus programs might be negated without the slightest warning because some or all the variables in the model go awry due to some reasons which were not foreseen at the time of planning. The government might adopt a deficit budget approach and expect the economy to respond accordingly (Garrett, Graddy, & Jackson, 2008). ...Show more