Question

What kind of budgetary policy counter business cycle?

Answer 1

Ans) Business cycle or trade cycle refers to the phenomenon of cyclical booms and depressions. In business cycle there are fluctuations in aggregate employment , income , output and price level.Fiscal policy is a type of budgetory policy to counter business cycle as it involves the use of taxation and public expenditure by the government for stabilisation or growth.During the phase of boom the government tries to reduce the unnecessary expenditure on non development activities in order to reduce the demand for goods and services so the government raises the rates of personal , corporate and commodity taxes.Boom phase involves high demand and results in overpricing of assets and high inflation which is not good for economy as it also results in the devaluation of currency so government borrow more from public to reduce the money supply . Policy during depression , during a depression the production level is low and high unemployment and a situation of falling prices the fiscal policy aims at increasing aggregate demand ,output , income and employment hence the increase in public expenditure increases the above items also the government purchases from open market as well as there is reduction in taxes as well as it also provides subsidies to increase the money supply.