Question

Define fiscal policy and the fiscal policy tools used to regulate the economy. What is countercyclical fiscal stimulus? Discuss the concept of crowding-out. What are automatic stabilizers and how do they affect the economy.

Answer 1

Fiscal policy refers to the use of government spending to manage the money supply in the country. Fiscal policy is mainly concerned with the money supply and the liquidity in the economy. Fiscal policies are used to manage the situations of liquid crises .

Tools of fiscal policy are

• Government spending - the expenditure of government during a year is the main constrain of fiscal policy
• Tax rate - The tax being the biggest source of government revenue is a part of fiscal policy
• Publi debt - the debt taken by government

The fiscal policy can be expansionary wich mean it will make liquidity in market and second type is contractionargy policy it refers to taking out money from circulation. It is one of the way to contoral inflation.

A countercyclical fiscal stimulus refers to the use of expansionary fiscal policy at the time of recession and the use of contractionargy policy at the time of boom. The reason behind this is to mantain a stable volume of money in the economy.

Crowding out is an concept that describes a situation where personal consumption and investments by business are reduced because of increases in government spending and deficit financing by the government. It is done by sucking up available financial resources and raising interest rates. Example is issuing bonds to lock people money

Automatic stabilizer are atype of fisal policy that is designed to offset the flutactions caused in the economy. They don't require excessive government intervention the best example is of progressive tax system.