Question

What is the business cycle? Explain.

What is fiscal policy?

What are the tools of fiscal policy?

Explain how fiscal policy can be used in a recession and provide an example from our recent economic history.

Answer 1

1. The business cycle is the inevitable upsurge and downsizing of economic activity over time. The period is a valuable tool for economic research. It can also be of use in making sound financial decisions. All companies and societies experience this cycle, but the duration of the process varies.
The Federal Reserve assists with monetary policy in handling the process, while the heads of state and legislative bodies use fiscal policy. Consumer trust has a role to play in the management of the economy and the current cycle process.The business cycle goes through four major phases: expansion, peak, contraction, and trough.

2. Fiscal policy refers to the use of government spending and tax policies to control economic conditions, including aggregate demand for goods and services, wages, inflation and economic development.

3. The two main tools of fiscal policy are taxes and spending. By deciding how much money the government will invest on some fields and how much money people can spend, taxes affect the economy. For example, if the government wants to stimulate consumer spending, it may cut taxes. A tax reduction provides extra funds for households, which the government hopes would, in effect, be spent on goods and services, thus spurring the entire economy. Spending is used as a fiscal-policy instrument to push government funds into those markets that need an economic boost. Whoever collects those dollars would have more money to invest – and the government expects, as with taxes, to invest it on other goods and services.

4.The government will employ expansionary fiscal policy during a recession by lowering tax rates to boost aggregate demand and fuel economic growth.

In reaction to the Great Recession, several nations of the world adopted fiscal stimulus policies starting in 2008. Such nations have used varying combinations of government spending and tax cuts to improve their dilapidated economies. Much of these proposals were based on the Keynesian idea that government deficit spending would offset some of the demand lost during a recession and avoid a lack of demand from wasting economic capital idled out. To further counter the global recession, the International Monetary Fund proposed that countries adopt fiscal stimulus measures equal to 2 per cent of their GDP. In subsequent years, fiscal consolidation measures were implemented by some countries in an effort to reduce debt and deficit levels while at the same time stimulating economic recovery.