Question

What are the problems associated with a cyclically balanced budget fiscal policy?

Answer 1

Fiscal policy:

Fiscal policy is a government policy in which government makes the plan of taxation and their spending. With the help of fiscal policy government can control the economy. This policy is based on British economist .this policy is neutral and undertaken when economy is in neither in expansion nor in recession.

The spending of the government on a different ways such as:

Advantages from printing money

Taxation

Fiscal reserve dipping

Fixed assets sale

Money borrowed from the abroad.

Cyclic balanced budget fiscal policy:

Simply, cyclic means upward and downwards movements.. it is that variables which is correlated either positively or negatively with fluctuations of business cycle. Cyclic fiscal policy is that situation in which government choose the higher spending and reduce taxes in the situation of economic expansion.

Fiscal policy of the government plays an important role in the economy stabilizing during the business cycle. Recession and boom are the two key phases of business cycle. There are two ways of business cycle: countercyclical, procyclical

Countercyclical fiscal policy: in this policy government counter boom through fiscal measures and works against the ongoing trend of boom. Countercyclical fiscal policy during recession and during boom are different. During recession is that situation where demands is slow and growth falls in the economy. In this situation governments has responsibility to create the demand by reducing tax and expenditure. Another case is countercyclical fiscal policy during boom, is situation of upswing of economic activities

According to the Keynesian economist, level of economic activity and aggregate demand affected when the government changes the level of spending and taxation.