Question

1. Why the government should stabilize prices?
2. The impact of government fiscal deficits and government fiscal surpluses on the country´s overall economy.

Answer 1

Price stability means that the economy is avoiding sustained inflation or deflation. It becomes necessary for the government to stabilise prices for various commodities to ensure that no parties are marginalised and their welfare reduced. For instance, governments often intervene to stabilise the prices of agricultural goods so that farmers don't suffer. Similarly stabilising prices can be seen as a way to keep a check on monopolistic practices which exploit consumers.

The government fiscal deficit arises when the government spends more than it earns. Deficits can harm and hamper the growth and stability of an economy in the long. If a nation ignores it's fiscal deficit, then it might face severe problems. The reason that economies tried to avoid fiscal deficits is because of its impact on various macroeconomic indicators like inflation, growth and therefore making debt management crucial. Many economists believe that crowding out effect could also be a result of fiscal deficits. Fiscal deficit tends to take a backseat for many economies because it's effect on the macroeconomic performance is shown only in the long run.

A government usually can have a surplus when they cut down spending in that financial year. This would mean that because of this reduced expenditure, the size of the economy may reduce than before when the government has a fiscal surplus. But it should be noted that fiscal surplus will also have am impact on macroeconomic indicators such as growth and inflation.