Question

Describe the main instruments of fiscal policy that are available to government.

Answer 1

Fiscal policy is often used to stabilize the economy over the course of the business cycle.

There are instruments of fiscal policy include:
- change in tax rates (a powerful instrument of fiscal policy in the hands of public authorities which greatly effect the changes in disposable income, consumption and investment)
- the budget of a nation
- public expenditure (the increased public spending will have a multiple effect upon income, output and employment exactly in the same way as increased investment has its effect on them)
- transfer payments;
- system of profit participation (an exemption from taxation for a shareholder in a company on dividends received, and potential capital gains arising on the sale of shares)
- unemployment benefits during periods of economic recession.