ALL RESPONSES MUST BE ORIGINAL. NO PLAGIARISM You must respond a minimum of 75 words each to the student 1 and 2 reply to the original discussion. ORIGINAL DISCUSSION QUESTION Fiscal policy refers to the changes in government’s choices regarding the overall level of government spending and taxes to influence the behavior of the economy. Fiscal policy can expand or contract aggregate demand. The government sometimes uses the fiscal policy instruments in an attempt to stabilize the economy. Under a recession, an expansionary fiscal policy is adopted, which involves lowering taxes and/or increasing government spending. In an overheated expansion with an inflationary pressure, a contractionary fiscal policy is utilized, which requires higher taxes and/or reduced government spending. Economists and policymakers disagree about how active the government should be in these fiscal policy efforts. Based on the above summary and the detailed descriptions of the fiscal policy issues in the textbook (Chapter 31) discuss the following questions: What are the expansionary and contractionary fiscal policies? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today? Should the government balance its budget? If you think it should, what steps do you suggest that it take to balance its budget? What is the relationship between budget deficits and national (public) debt? Why has the U.S. national debt been increasing for decades? Should the tax laws be reformed to encourage saving? Do you think consumption tax is better than income tax? STUDENT 1 REPLY TO THE ORIGINAL DISCUSSION QUESTION Hello class. Expansionary fiscal policy is government policy that is often enacted during times when the economy contracts or enters a recession. Under an expansionary fiscal policy, the government will often increase spending, cut taxes, or do both (McConnell, Brue, & Flynn, 2015). This policy is intended to increase demand which in turn, should raise GDP in the country (McConnell, Brue, & Flynn, 2015). Contractionary fiscal policy is pretty much the opposite. If demand starts to outpace supply in the country, the government often enacts a contractionary policy to help curb demand. They do this by cutting spending, increasing taxes, or both (McConnell, Brue, & Flynn, 2015). This policy is intended to decrease demand which in turn, should lower inflation (McConnell, Brue, & Flynn, 2015). Given the current economic situation in this country, I think the government should cut taxes to a degree (especially for businesses) to help spur more economic growth by having companies move more operations back to the US. I think the government should also raise interest rates slightly. The biggest thing the government should stop doing is borrowing money and start paying down the national debt. When the country is in debt 20 trillion dollars, that is a concern that needs to be addressed. I think seeing that national debt balance decrease would increase investor confidence and help spur economic growth as well. Also, the government should absolutely balance its budget. It can do this by cutting unnecessary spending, sticking to its budgets, and being fiscally responsible. There is a major issue with appropriation law that causes agencies to spend like crazy near the end of a fiscal year. If an appropriation is funded by Congress and that appropriation does not spend all its money, the remainder goes back to the government and next year’s budget is often cut for that agency/appropriation. Agencies do not want funding reduced, so to keep their appropriation budgets at the previous year’s levels or higher the following year, they often spend any remaining money at the end of the year and government agency budgets keep bloating over time. This is fiscally irresponsible and that is something that needs to change if we are to get our debt under control. If the fat was cut in the President’s budget, there would be more money from tax revenues and other sources to allow for less government spending and that money could be applied to our debts. I think both consumption taxes and income taxes are important and we should not do away with either, as they both have their place. That being said, I think there should be a complete overhaul of our ridiculously complicated tax system and tax rates should be reduced, especially in the case of corporations. My opinion is that a lot tax reform needs to occur and that would spur economic growth better than increasing income or consumption tax. STUDENT 2 RESPONSE TO THE ORIGINAL DISCUSSION QUESTION Hello Professor and Fellow Class, What are the expansionary and contractionary fiscal policies? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today? The government uses expansionary fiscal policies when the economy is in a recession and a contractionary fiscal policy when the economy is in a hard to control expansion. They alter taxes and government spending to have an effect on domestic output and employment, control inflation and stimulate economic growth.The inflationary gap is when actual gross domestic product exceeds potential full-employment GDP. Recessionary gap is the opposite of that. The government can eliminate an inflationary gap by reducing spending and decreasing taxes. This works because a decrease in government demand for goods and services also decreases the aggregate demand curve (Forsythe, 2012). We are in a large expansion right now and I think a contractionary fiscal policy is most appropriate. Should the government balance its budget? If you think it should, what steps do you suggest that it take to balance its budget? There are arguments for and against balancing the budget. Balancing the budget seems to make sense but it can also cause unnecessary negative effects, especially in a recession. Keynesian economists argue about changing the budgeting policy depending on the business cycle. In a recession they would allow a deficit to occur and in an expansion they would allow surpluses (Arguments for and Against Balancing the Budget, 2016). This approach make sense to me. What is the relationship between budget deficits and national (public) debt? Why has the U.S. national debt been increasing for decades? The budget deficits and surpluses are the government’s revenues minus their expenses. All of the budget deficits and surpluses add up to make the national public debt. The national debt has been increasing for decades because the government has a nearly impossible time spending less than what they make. This is caused by war, economic recessions and inflation. Should the tax laws be reformed to encourage saving? Do you think consumption tax is better than income tax? Some states are converting to heavier consumption tax. In theory this allows them to earn steady revenue including in recessions when they make less. I like this idea and think consumption tax is better than income tax. HERE IS AN EXAMPLE HOW TO RESPOND TO STUDENT 1 AND 2 RESPONSE TO ORIGINAL QUESTION Hello Josh, This is a well written post. I agree with what said. I think that the budget should be better controlled and that appropriation budgets are fiscally irresponsible. Keynesian economists take a mixed approach and think it is okay to allow deficits when we are in a recession and surpluses when we are in an expansion. Either way the debt is so ridiculous it is going to take a long time to get out of it. I also like what you said about the tax system being ridiculously complicated. It can be discouraging for people to even try to start a business because of all of the complexities. A mix of consumption and income tax makes sense. Some states are going more heavily toward consumption tax. They claim that it will help them maintain steady revenue even in a recession. I am interested in how that will pan out. Once again, nice post.