Question

What fiscal policy recommendations would you provide based on the current state of the economy, the budget deficit, and the national debt? Is your recommendation pro-cyclical or counter-cyclical? Explain your policy choices.

Answer 1

ans....
Fiscal policy are actions that are taken by the central government as a control measure over government spending and taxes. These measures stabilize the business cycle, reduce unemployment and inflation and further aim at promoting economic growth.
The tools used for fiscal policy are:
1. Government purchases
2. Taxes
3. Transfer payments.
Fiscal policies can be introduced only by means of the above mentioned tools. For example,
1. By increasing Government expenditure: The government's will improve its purchases which will increase its expenses. This policy will contribute to the expansionary fiscal policy and will increase the nation's debt. But this will also aid in increasing employment, increasing wages and will indirectly contribute to the increase in taxes.This is counter-cyclical policy recommendation since this will start stimulating the economy.
2. By increased consumer purchases: When consumer purchases increases, it means that the consumer income has increased. This can contribute to the GDP of the economy and thereby by striking a balance between the supply and the demand. This is a counter-cyclical measure.
3. By increasing taxes by a sllight margin but on regular intervals: The impact of taxes will be heavy if they are increased at a stretch. But rather when the taxes are given a marginal increase, the public will not react against it. The government should study the revenue generated from this marginal increase and further should again increase the taxes marginally.
The impact of tax increase will be gradual and steady when taxes are increased at regular intervals. This will contribute to the revenue generated from tax. This will help the government to overcome budget deficit and further to recover from national debt.This will be a counter cyclical fiscal policy since the larger portion of the income is taxed. Progressive taxing tends to decrease demand when the economy is booming.