Question

Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy.

Answer 1

Answer:-

Fiscal policy is the policy related to government taxation and government expenditure. A discretionary fiscal policy is based on the judgment of policymakers in which a policy objective is identified and relevant measures are taken related to that objective. for example, imposing a new tax or changing income tax exemptions, raising expenditure etc.

In response to the changing economic environment, when the taxes or expenditure automatically, which helps in the fighting boom, recession or unemployment etc is called non-discretionary or automatic stabilization policy. For example, progressive income tax and unemployment compensation.

The key differences between the two include the timing of implementation. While automatic stabilizers are implemented without any time lag, discretionary fiscal policy requires government legislation and is a long process. Also, automatic stabilizers are narrow in fulfilling their objectives like controlling aggregate demand, a discretionary policy can target various areas of the economy like unemployment.Thus, both should work hand in hand to achieve the broader objectives of the economy.