13. Describe the main tools of fiscal policy. What are its drawbacks in comparison with monetary policy? Stabilizing The Economy

The federal govern­ment tries to stabilize the economy. Congress stated that "it is the continuing policy and responsibility of the federal government ... to promote maximum employment, production, and purchasing power."

To achieve these goals the government relies upon two sets of "tools" or strategies: fiscal policy — the use of the federal government's power to tax and spend to regulate the level of economic activity, and monetary policy — the use of the govern­ment's power to control the money supply to regulate the level of economic activity. Before the Great Depression in the United States, the government doesn`t regulate the market. But after the Second World War the government had to take a proactive (профилактический) role in the economy to regulate unemployment, business cycles, inflation and the cost of money.

Fiscal Policy. Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence decreases inflation (generally considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy is the responsibility of the President and Congress because they control tax­ing and spending.

GNP is equal to the total spent by consumers, business investment and government.

To overcome a recession the government should use their fiscal tools. That could be done in either of two ways: taxes could be lowered while spending remained about the same, or spending could be increased while taxes remained unchanged.

When taxes are reduced or government spending is increased, individuals and business firms will have more money available to spend for the things they want. As business and consumer spending (and therefore the GNP) begins to increase, the economy will enter the expansion phase.

Fiscal tools can also be used to slow the economy. To bring the inflation to an end, the President and Congress decide to increase taxes or reduce government spending to solve the problem. This would create a contraction in the total demand for goods that should reduce inflation.

Fiscal Policy Has Its Critics.

When government reduces taxes to fight a recession, it often creates a budget deficit. That is, its revenues will be less than its expenditures, and the government's debt will increase.

If the government chooses to borrow from the public to offset (компенсировать) a tax reduction, the money it borrows cannot be spent by the lenders. Furthermore, it may crowd out private borrowers because it is reducing the supply of available funds. This can also have the effect of raising interest rates, making it more difficult for individuals and businesses to borrow.

The federal government can also finance its debts by printing money. Unfortunately, such increases in the money supply tend to fuel inflation by pushing up prices.