Answer to Question #309842 in Microeconomics for Vuvu

Question

Explain the two (2) main tools of fiscal policy.

Answer 1

The fiscal policy refers to formulated government policies that are used to boost the economic growth of a country. The two main fiscal policies used are taxation and public expenditure. It is also known as fiscal instruments or fiscal levers.

1. Taxation

Taxes transmit people’s income either directly or indirectly to the government. Disposable income is reduced through an increase in taxes. It influences the economic status by validating how much people have to spend on their purchasing power and how much the government has to spend across various sectors. For example, an increase in taxation to control inflation and tax reduction during the depression.

2. Public expenditure

This is financial spending made by the government on various needs to boost the sectors economically. It gives a raise on individuals' income and demand for commodities. Thus, a decrease in public expenditure controls inflation, and a rise in expenditure fights recession.