The Macroeconomic Environment Essay Example | Topics and Well Written Essays - 1500 words

The Macroeconomic Environment - Essay Example ons which are differentiated by government deficit or the â€Å"difference between what the government pays out (government expenditure) and what it takes in (tax revenues).† (Weil 2002) The first state is the contractionary or tight fiscal policy wherein the government expenditure is lesser than its revenues or budget surplus. On the other hand, it is called expansionary or loose fiscal policy when government spending is larger than its revenues resulting to budget deficit. (Weil 2002) In devising a fiscal expansion policy, the government should consider certain economic indicators and factors that are affected. These are interest rate, exchange rate, trade balance, Gross Domestic Product (GDP), and aggregate demand. Weil (2002) and Hemming et al. (2002) observe the possible effects of fiscal expansion on these factors which contribute for economic stability. Richard Hemming et al. (2002) see expansionary fiscal policy as beneficial in stimulating economic activity. They use the events like Asian Financial Crisis of 1997 and recessions in Europe and the United States as empirical evidences of the negative effects of contractionary fiscal policy through strong tax systems. Weil (2002) sees beneficial effect of fiscal expansion on managing the economy through the gross domestic product (GDP) or the total amount produced. Fiscal expansion results to increase in demand for goods and services which in effect raises both the output and price. However, the degree of increase on these two factors depends on the state of the economy according to Weil (2002). â€Å"If the economy is in recession, with unused productive capacity and unemployed workers, then increases in demand will lead mostly to more output without changing the price level. If the economy is at full employment, by contrast, a fiscal expansion will have more effect on prices and l ess impact on total output.† (Weil 2002) Weil (2002) states fiscal expansion raises the aggregate demand or the total demand for