Question

DEFINE FISCAL POLICY. WOULD THE INCREASE OF $100 IN GOVERNMENT SPENDING HAVE THE SAME EFFECT ON GDP AS OF DECREASE IN TAXES OF $100? WHY OR WHY NOT?

Answer 1

=> ANSWER ::

Fiscal Policy is the use of government Policy When government use Government spending and Taxation to control the economy of the country. by the use of fiscal policy government influence the money supply in the economy by that they control the economic situation. By the Fiscal Policy Government Influence the Money supply and it effect the aggregate demand of the country which helps government to stabiles the price level of the country, employment and it helps to fight against the inflation and deflation in the economy. In the Fiscal Policy Government take Two Type Of action ;

(1) Change In the taxation System Which effect The Consumption and Money Supply

(2) Increase/Decrease Government Spending In The Country

So According To That there are two type of Fiscal Policy (1) Expansionary (2)Contractionary Fiscal Policy

(i) Increase Of $100 In Government spending Have Not The Same effect On The GDP As Of Decrease In The Taxes Of $100, It Is Because The Effect On GDP Of Increase Or Decrease Of Spending and Taxation Is Defined By The Spending Multiplier and Marginal Propensity Of Consume(MPC). As Spending Multiplier Is Higher It Effect On GDP Also Larger So Spending Multiplier = 1/(1-MPC) . Taxes Multiplier is calculated by MPC/(1-MPC). So Effect Of Spending And Taxes Is Defined By The Multiplier Effect On The GDP.