Question

Imagine you were called in by the government to advice on whether it should attempt to prevent cyclical fluctuations by the use of fiscal policy. What advices would you give and how would you justify the advices? (Answer in depth) *600 words

Answer 1

I would advise the government to use Fiscal policy to prevent cyclical fluctuations. Before discussing the fiscal policy, we should understand the cyclical fluctuations.

Cyclical fluctuations are alternating periods of contraction and expansion that can last for 18 months or a longer from Peak to Trough of the cycle. Real Gdp tells where we have been and where we are heading towards. It can increase over time, economy is growing. Its the period of expansion or recovery. If it is continue to grow before it declines, it shows economy is shrinking or contracting. Trough is the lowest level of contraction.

Every economy has three main economic goals

1) To promote long-term economic growth

2) To prevent excessive unemployment.

3) To keep prices stable to limit inflation.

Fiscal policy refers to the process by which taxation and public expenditure programs are shaped to control the degree of cyclical fluctuations. Fiscal policy is the guiding force that helps the government decide how much money it should spend to support the economic activity and how much revenue it must earn to keep the business cycle running smoothly. Fiscal policy prevents the cyclical fluctuations by following ways:

1. Fiscal incentives like tax concessions, subsidies may promote those industries which has high employment potential. Government takes the public finance in the way so as to reduce cyclical fluctuations and achieve full employment.

2. To achieve rapid economic growth and development, fiscal policy is considered to be the most powerful anticycle tool for the government. Government mobilize resources and channelize these resources to productive activities so as to reap benefitsof rapid economic growth.

3. Fiscal policy can be effective tool to achieve economic stability. The cyclical fluctuations and inflation can be effectively managed with the tools of fiscal policies like taxation, public expenditure, public debts and deficit financing.