Question

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

Answer 1

Firstly, the government may initiate an expansionary fiscal policy by reducing tax rates to increase aggregate demand and spur economic growth. Also, the government can increase spending through purchases of final goods and services. On the other hand, the government can also raise grants to local governments to enable them to purchase final goods and services. Besides that, there should be an Increase in government spending, which will result to increase in employment and push up demand and growth. Furthermore, 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.