Question

Explain how you would assess the size of the government deficit to determine whether the government was using fiscal policy to expand or contract the economy.

Answer 1

Fiscal policy refers to the policy under which the government uses the tools such as taxation,public spending and public borrowing to achieve it's obejectives of economic policy.An effective policy uses all these tools in a proper combination to achieve the best possible and desired result like maintaining economic stability,employment and increasing the growth rate of the economy.

The government budget is in deficit when the government is spending more than it's revenue and it is in surplus when it is in surplus when it spends less and increase the taxes thus,increasing its revenue.

Expansionary policy-The policy is said to be expansionary when the spending increases and taxes are low.The expansionary policy leads to higher budget deficits because the government could spend more than what it could generate in revenue through taxes.The government can borrow more money from the private sector and use treasurys to raise funds.The government as a debtor has to pay such amount for which the government would increase tax receipts,cut the spending and borrow more funds and print more dollars.In the short-run,either surpluses will shrink or deficits will grow.

Contractionary policy-The policy is said to be contractionary when spending decreases or taxes rises which results in reduction in deficits and surpluses will increase.As the government cuts spending and increae taxes,the government will save the funds and get higher revenue from the taxes.As the spending and expenditure decreases,the government will also stop borrowing which will decrease its future obligations.