Question

3) Fiscal Policy
a. What does fiscal policy refer to?
b. How could fiscal policy affect AD?
c. Why would a government use fiscal policy to stabilize the economy ?
d. What, specifically, would they do to stabilize?
e. What are some of the risks of using fiscal policy to stabilize?
f. What are automatic fiscal stabilizers, and how do they affect the budget deficit/surplus?

Answer 1

Part a)Fiscal policy- It is a policy adopted by government to bring stability by employing taxes and incur expenditure.

Part B)Fiscal policy affects aggregate demand through changes in government spending and taxation. Those factors influence employment and household income, which then impact consumer spending and investment. Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate.

Part C)managing the economy because of its ability to affect the total amount of output produced—that is, gross domestic product. The first impact of a fiscal expansion is to raise the demand for goods and services. This greater demand leads to increases in both output and prices.

Part D)Governments have two general tools available to stabilize economic fluctuations: fiscal policy and monetary policy. ... Fiscal policy can do this by increasing or decreasing aggregate demand, which is the demand for all goods and services in an economy.