Question

Monetary policy refers to Federal Reserve actions to influence the money supply and economic conditions. Fiscal policy is spending and taxing by the government, which can also affect economic conditions. Describe how changes in spending and taxes can affect economic activities. (typing please,thank you.)

Answer 1

Ans) In case of an economic slowdown and its negative impact on the economy, the government tends to increase its spending, and rolls out higher number of capital in in the market in order to boost economic growth. Thus, it is clearly visible that an increase in government spending has a direct impact on the economic activities. When the economy is in recession or depression like situation, it becomes extremely important for the government to increase spending to boost the economic activities.

Other side to this is to ensure that the spending is effective and that majority number of developmental and growth projects are being carried out, or it may lead to negative repercussions adding to the existing economic burden. The government aims at increasing investments, decreasing interest rates, borrowing loans from outside to boost that capital In the economy in order to revive the economy. All this is basically done, when the growth rate is declining or has been stagnant since a very long time, or when the economy is in depression.

Now, an exact opposite concept to the above is the effects of taxation on the economic activities. Increase in taxes decreases the purchasing power of the consumers, also effects on the saving capacity can be experienced, and a decrease in demand is gradually seen. This is a move, that the government makes to bring down the prices or to control it. For eg. A mobile phone before an increase in taxes was available for $100 and now after an increase is available for 130, this shall discourage the consumer from buying the product, and thus there shall be a decrease in it's demand, and price for it shall go down.

And if taxes are cut down, demand shall go up, as the consumers will have to pay less for the same product. Also when the purchasing power is reduced, the consumers may make an attempt to save the money.

Thus any sorts of changes in the spending or taxes by the government can have severe or adverse effects on economic activities.