Answer to Question #70026 in Macroeconomics for Sam

Question

1. Describe the main instruments of fiscal policy that are available to the government
2. Drawing from the statement above, how can government finance increased expenditure?

Answer 1

1. Fiscal policy is often used to stabilize the economy over the course of the business cycle.
Discretionary policy is a deliberate change in the size of state taxes, expenditures and the balance of the state budget as a result of a change in legislation aimed at: stabilization of the economy, achievement of equilibrium in economy; increase of employment level; decrease of inflation rates.
The instruments of discretionary fiscal policy include:
- change in tax rates;
- cancellation or introduction of new taxes or tax breaks;
- transfers, the volumes of which are neutral with respect to the amount of income. Discretionary fiscal policy depending on the phase of the cycle can be:
stimulating (expansion) fiscal policy is fiscal policy aimed at increasing public spending and reducing taxes in order to increase aggregate demand in the economy during a cyclical downturn;
stimulating (restrictive) fiscal policy is a fiscal policy that reduces public expenditures and increases taxes in order to reduce aggregate demand in conditions of excessive demand during cyclical upsurge;
non-discriptive (automatic) fiscal policy is the policy of embedded stabilizers, it is not related to the change of laws;
An automatic ("built-in") stabilizer is a mechanism that allows reducing cyclical fluctuations in the economy without changing the tax legislation. Such stabilizers are:
- progressive tax system;
- transfer payments;
- system of profit participation;
- unemployment benefits during periods of economic recession.
2. Increases in government spending are expansionary. Increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions. Classical economists, on the other hand, is a thought that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive.
Sources:
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