Question

What fiscal policies, if any, do you believe should be applied to responsibly manage our economy?

Answer 1

Answer -

Fiscal policy is an important measure adopted by the Government for managing the economy. Through this policy government can decide how much money it should spend on public welfare activities.It also guides the government how much amount of revenue it requires for maintaining the smooth flow of economy. If government expects a growth in the economy it will increase spending of goods and services in the economy, this results into increase in demand for goods and services and ultimately government spending leads to better economic growth.There are three measures of fiscal policy.

A) Expansionary policy: During the recession phase in the econonomy government decreses the tax rates and increase the levels of incomes of people so demand for goods and services increases i.e.increase in agreegate demand of the country which will result in increase levels of production, employment, incomes and it helps to increase economic activities in the country.

B)Contractionary policy : This policy is adopted by the government to control inflation in the economy. In this case government increase tax rates and reduce its spending activities, it decreses demand for goods and services and also decrease in agreegate demand. As tax rates increases disposable income of people decreases and consumption level also decreases, so no excess money of people do not spend for consumption in the phase of inflation and saving habit of the people will also increase. Because of increase in savings and investments, economy will be stabilised by increase in demand and production activities in the country.

C) Transfer payments - It is also an important measure of fiscal policy. Transfer payments are made by the government without any exchange of goods and services. These are made for the purpose of reducing income equality and to redistribute the money who are in need of it. For example unemployment allowance given by the government to unemployed people who can't find a job. As they are jobless government provide them financial security to some extent.These unemployed people received it without any exchange of goods or any service so it is called transfer payment. In case of social security measures also government transfer it for social service and welfare. It also includes subsidy, retirement benefits , medical benefits etc.The purpose of all these to help economically weaker sections of the society and also increases their consumption and ultimately results in agreegate demand for goods and services.