Question

1. List the tools of fiscal policy and discuss how they may be used to avert a recession.  

2. What are the main arguments put forward by supply-side economics and the limitations of this arguments? 

include examples

Answer 1

Part A

The fiscal policy is the policy of the government. There are two primary tools of fiscal policy such as taxation and spending. The objective of the policy is to maintain economic growth. The fiscal policy can use both the time of recession and boom. At the time of recession, the government will increase the expenditure or reduce the taxes. Both these measures can improve the money in the hand of people. It increases the demand for the economy and add more jobs and stimulates supply.

Part B

The supply-side economist argued that the increased production would move economic growth. The tools used by the supply side economist is tax cuts and deregulation. This policy can benefit for the businesses, and it leads to hiring more workers. The more job created would lead to an increase in the demand and economy gets the further expansion.

The limitations of this argument are that it is costly to implement. The supply-side measures will hurt the distribution of income in the short-run. The tax cut will reduce the union power, and the deregulation will enhance the gap between rich and poor which means that the inequality in the economy will increase.