Fiscal Policy In Practice

President John F. Kennedy adopted the principles of Keynesian economics in 1961, and fiscal policy became one of the nations main weapons for fighting recession or inflation. He proposed substantial’ tax cuts to lift the economy om of a slump after these were enacted, the economy grew rapidly. However, when the fiscal expansion from the Vietnam buildup during 1965-1966 was added to the tax cuts, output rose above potential GDP and inflation began to heat up. To fight the rising inflation and . offset the Increased Vietnam war expenditures, Congress passed a temporary surtax on incomes in 1968.

The 1980 provided another dramatic demonstration of how fiscal policy works. In 1981, Congress passed President Ronald Reagan’s “supply-side tax cuts” along with a large increase in defense spending. The fiscal expansion helped pull the American economy out of the .deep recession of 1981′:”1982

The twenty-first century ushered in a period of budget surpluses for the United States. With the new fiscal position, and deficit reduction no longer a priority, political candidates debated fiercely about the best fiscal course to steer. Some argued for using the, surplus to reduce the government debt; others wanted to reduce taxes; still others advocated increasing spending grams, particularly on health care. These debates were focused primarily on the allocation role of fiscal policy and the stabilization impacts were large'” ignored.

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