Answer to Question #127492 in Economics of Enterprise for Liya

Question

Explain how fiscal policy can be implemented if an economy is in the downswing of a business cycle

Answer 1

Explain how fiscal policy can be implemented if an economy is in the downswing of a business cycle

Governments use fiscal policy to influence the economy's path through changes in the expenditure, taxes, and shift in demand, among other measures. When an economy is the downsizing of a business cycle, that means the economy is facing a recession, which means a significant decline in economic activities.

This results in a negative GDP growth rate for some time. Some features of the recession include high unemployment rate, low standard of living, increased government borrowing, low aggregate demand, and low output.

To mitigate this:

According to (Fiscal Policy Definition, 2020), The government may initiate an expansionary fiscal policy by reducing tax rates to increase aggregate demand and spur economic growth. The government can increase spending through purchases of final goods and services. The government can also raise grants to local governments to enable them to purchase final goods and services.

Increase government spending, which will result to increase in employment and push up demand and growth. The government can raise disposable income by cutting payroll taxes. The government can also boost investments by raising after-tax profits through cuts in business taxes.

Reference

Investopedia. 2020. Fiscal Policy Definition. [online] Available at: <https://www.investopedia.com/terms/f/fiscalpolicy.asp> [Accessed 26 July 2020].