Question

what are the major components of government outlays? What are the major sources of government revenues? Explain how fiscal policy affects the overall economic activity.

Answer 1

Answer : The major sources of government outlays are :

• Government Purchases : It means that when government spends money on the purchase of goods and services such as non-defence goods or another types of goods.
• Transfer payment : A payment made by the government in the form of grants, pension, old age benefits and subsidies.
• Net interest payment : The total amount of interest paid by the government on funds that it has been borrowed from them. The net interest means interest paid to the investors of the government to the lenders.

• Spend more on transfers rather than on non-military goods and services.

Main sources of Government revenue are :

• Personal Taxes are the taxes that have been collected from general public against there income earned during the financial year.
• Contribution for social insurance that amount has been collected from general public.
• Indirect Business Taxes. It means that different types of taxes such as VAT etc that has been generated income for the government.

Fiscal policy affect the overall economic activity :

As we know fiscal policy is fed government policy for proper functioning of the government at center and state level. It is an effective tool for managing aggregate demand in the short run as well as long run.

Main objective is that

• To maintian price stability.
• Decrease unemployment from an economy
• Infrastructure of the country has been developed
• Education level has been increased

With Expansionary Fiscal policy more spending in an economy than taxes. There are budget deficit . It has been resulted in more economic growth of the country .

With Contraction of fiscal policy less spending and more tax collection by the government. It resulted in budget surplus and less economy growth. In the economy less spending in an economy than taxes.