Question

Explain how stability can be achieved through fiscal policy.

Discuss how stability can be achieved through the fiscal policy.

Answer 1

Economic stability can be attained by the appropriate use of fiscal policy. To combat unemployment and depression, the following fiscal actions must be taken:

1. When government spending surpasses revenue, the government should adopt a deficit budget policy. Deficit financing is one way to pay for the deficit. As a result, government spending will rise.
2. It is necessary to lower taxes in order to provide people more purchasing power. Spending on consumption will rise as a result.
3. Increased public spending is necessary, especially for public works projects and the provision of social security benefits like unemployment insurance and pensions.
4. The people whose money is sitting around should lend it to the government.

Therefore, in order to combat unemployment in the economy, the government should implement an expansionary fiscal policy. The strategy of lowering taxes and raising government spending is known as expansionary fiscal policy. All of these actions will raise overall demand, which will raise output and job creation.

Therefore, in order to attain economic stability, the government needs implement a counter-cyclical fiscal policy. This implies that taxes and government spending can fluctuate in an anti-cycle manner, with taxes rising and spending falling during the expansionary (boom and inflation) phase of the cycle and spending rising and taxes falling during the contraction (depression) phase.