Canada Fiscal Policy

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Fiscal policy is a completely legitimate tool used by government officials to correct fluctuations in the economy. Fiscal policy use is a deliberate and intentional action on behalf of the government to step in and influence the economy by adjusting its spending levels and tax rates. There are two types of fiscal policies: expansionary fiscal policy and contractionary fiscal policy. These two policies are used in two completely opposite situations; an expansionary fiscal policy is used to correct a recessionary gap when gross domestic product(GDP) is lower than the level at full employment. A contractionary fiscal policy on the other hand is used to correct an inflationary gap when an economy’s GDP is higher than the level at full employment, …show more content…
This will trigger a major effect on banks being a main financial intermediary in the Canadian economy. The main function of banks is to accept deposits and in turn, loan out money while keeping a stable required reserves which is usually at 10%. When the government is making use of an expansionary fiscal policy, more public spending creates more jobs thus lowering the unemployment rate, and a lower tax rate will enable those additional workers to have an increased disposable income. This will trigger spending and boost the economy. In this situation, the banks will have an increased number of deposits, and will eventually loan out more money; this increases money supply in the economy. As the money supply increases through banks, the money multiplier effect will come into action and will further stimulate money supply. Furthermore, the Canadian government needs to practice what is called fiscal deficit spending to stimulate the economy. This means that the government will spend more money than they collect through tax revenues. Therefore, the government will need to borrow funds, which results in increased public