What does Fiscal Policy Mean?


Fiscal policy are the policies implemented by the government to influence the macroeconomic conditions in the economy. These policies can be used to curb aggregate demand or supply and even increase it. Fiscal policies are generally implemented along with monetary policies, which are implemented by the central bank, to control the money supply in the economy. By influencing money supply government and thus influence economic growth and employment levels.

The tools under fiscal policy are-

1. The most important tool of fiscal policy under the control of the government is the taxation. The government adjusts the tax rates according to the economic conditions and needs of the country. Other than providing funds for the government, taxes can also help in controlling fluctuations in the economy. The government increases the taxes of the commodities that are not productive and the ones that brings harm to the citizens of the country.

2. Another tool for the government is subsidies. Subsidies are given by the government to promote certain things that are needed for growth and development. They are also given to people who cannot afford certain basic necessities. For example: The government gives subsidies for fertilizers and pesticides so that farmers can afford them. Also, education is highly subsidised in government schools as it is seen as an important factor for economic growth and development.

3. Public expenditure is another fiscal policy adopted by the government. The government undertakes certain projects for the development of the community. Along with the development of infrastructure, these projects also employ many people, increasing the income of money. The government halts such activities when the money flow is more in the economy, in such cases these projects will not help but keep increasing the flow of money and worsen the economic conditions so these unnecessary expenditures is stopped.

The types of fiscal policy

1. Expansionary- The expansionary fiscal policy triggers economic growth. The government ties to increase money supply in the economy through expansionary policy. The government would increase public expenditure or continue the halt projects to increase employment and giving jobs to many. It would also increase the subsidies or provide subsidies in necessary commodities and on the other hand, it would cut down the taxes. This increases the purchasing power of the people, thus increasing overall aggregate demand and aggregate supply. All these elements blend together and lead to economic growth. The expansionary policy also helps during deflation.

2. Contractionary- It is the exact opposite of expansionary policy. The objective of contractionary policy is to reduce economic growth, these policies are generally undertaken during inflation when the prices are extremely high and money supply is too much in the economy. The government curtails unwanted expenditure, reduces subsidies and increases taxes to reduce the money supply and tries to bring the economy back to normal as long-term effects of inflation can also be harmful. The main objective is to reduce the excess money from the economy.

These policies along with the monetary policies try to stabilise the economy in case of any fluctuations and hence the tools used by the government and the central bank to influence the money flow has to be used very carefully.

What is 10-Year US Treasury Yield

United States of America is probably the strongest and financially prudent countries in the whole wide world. The monetary kings deliver three kinds of debt securities to their people: Treasury Bills, Treasury Notes and Treasury Bonds. The Treasury Bills only have the maturity of a year and is the one that has the shortest matured date. They are issued at discounts to balance the no coupon payments and all that stuff the Reserves serves for its investors.  The Treasury Bonds and Treasury Bills have no drastic changes in between them except for time of maturity. The Treasury Bonds have maturities more than ten years. Obviously, the longer the maturity length, the higher the yearly yield would be.

As the name suggests a 10-year Treasury note works as a debt mechanism for the US citizens by the United States of America government. Upon its issuance, it has got the maturity of ten years. It is the only one system by the government that matures within a decade. The financial strength of US is considered to be the best with no worries and only security and assurance. The guarantee by them with the ten year maturity is the strongest assurance to the public.

The main advantage of owning the 10-year Treasury note is that it gives you interests at a fixed rate once every six months. Along with that, the actual value is paid at the time of maturity. Basically, Treasury note rate is the yield, or in other words, your earnings. The Treasury Department auctions the Treasury notes with a preset face value and rate of interest. The fixed interest rate and the yield are totally different aspects and can be easily misunderstood. The 10-year Treasury rate may not always mean the interest rate. They mean the yield.

The 10-year Treasury note is the most widely used government financial instrument. The yield is used mostly as a yardstick even for mortgage rates. Thus the yield holds a key part in the Treasury workings and is a factor in all the interest rates in the US economy. In the year of 2018, the yield from the 10-year Treasury climbed for the most part of the year because of certain assumptions and regards about the mounting interest rates from the Federal Reserve. However, these assumptions and expectations dropped down on the road to the end of the year, resulting in a drop in the rate of yield as well.

The rise in yield happens when the price of the bond drops. In 2018, most of the investors were happy or even exhilarated when the US decided to postpone the increase in tariffs for Chinese goods and that resulted in the yield going straight upwards. After that initial surge, the yield soon declined when the year ended. When the experts and analysts scale things down their hopes for an economic surge, the yields also travel downwards steadily. That is how it works here. When the Federal Reserve’s policy rates becomes close to a rise or at a level that wouldn’t alter the tempo of the economy, it would indicate that the US economy is strong and will send the stocks higher and the yield lower.  

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