Question

The government has many tools at its disposal to help create stability for an economy. Explain the best type of fiscal policy for our economy right now. Fiscal policy involves changes in government spending and/or taxes. Explain what has a more direct impact on stimulating an economy out of those two tools that can be used by fiscal policy.

 

Answer 1

The government has many tools at its disposal to help create stability for an economy, these tools comes under fiscal policy. It is of two types 1st is the Expansionary fiscal policy which includes tax cuts, transfer payments, rebates and increased government spending on projects such as infrastructure improvements. It is sdopted during recession to boost the economy and the 2nd is contractionary fiscal policy which is adopted to slow down the economy and hence control inflation.

As of now due to the COVID-19 pendamic the economy has slowed down and hence there is a need to stimulate the economy which can be done by an expansionary fiscal policy. This can be done by either increasing government expenditure or by decreasing (cutting down) taxes.

Out of the two given tools, the increase in government spending has more direct impact on stimulating an economy. This is because if government wants to increase its spending as a tool for expansionary fiscal policy to push the economy it will spend only on such goods and services which will increase the real output in the economy like infrastructure, education, training etc which will also increase the overall productivity of the economy in addition to increasing the income of people. But if there is a tax cut, though it will increase the disposable income of the people which must increase the aggregate demand but it may not be of the same level as the tax cut because when there is increase in income some portion of it goes for savings. So if people starts savjng more than the tax cut will not be more effective in stimulating the economy.