Answer to Question #118428 in Macroeconomics for Karan Bhanot

Question

Prime minister of india promised a more aggressive fiscal policy with large increase in spending and significant tax cuts leafing to much larger budget deficit. The Indian economy was near the full employment rate ( in India unemployment rate was below 5%), what would India's central bank response in terms of changes to the cash rate? Explain

Answer 1

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.The central bank of India can therefore reduce the cash rate so as to make funds affordable for these activities in the economy.