Explain fiscal policy, Microeconomics

Assignment Help:

Fiscal Policy

Fiscal policy refers to the management of government spending and tax policies to influence total desired spending so as to achieve the desired level of economic growth and other social objectives. The classical thinker's believed in the laissez faire policy, in which the government adopts a hands-off policy, i.e., it does not interfere with the day to day business activates. But, after the great depression of 1930s, the role of the government has become crucial to stabilize business activities and the GDP.

Fiscal Policy is also called the budgetary policy. Budget is the manifestation of the fiscal policy. The government can prepare three types of budgets: (i) Balanced budget, (ii) Surplus budget, and (iii) Deficit budget.

In the balanced budget, the government total revenue equals the total expenditure.

In the surplus budget, the government total expenditure is less than the total revenue of the government.

In the deficit budget, the government total expenditure exceeds the total revenue.

The Budget balance is the difference between total government revenue and total government spending, i.e., taxes minus government spending.

There are two important tools of fiscal policy:

(i) Government expenditure and (ii) taxation.

In case, the economy is caught in the quagmire of depression or recession, the level of business activities falls, and as a result, the GDP decreases. To increase the level of the GDP and to revive business activities, the government may increase public expenditure and reduced the rates of taxes. Lower tax rates will increase private disposable income and increased government expenditure will also help in rising the desired aggregate spending. Consequently, the level of output, employment and income (GDP) will rise.

On the contrary, if the economy is 'over heated and the actual level of GDP is more than the potential level, the aggregate output (GDP) will exceed aggregate spending, as a result, prices tend to rise and inflationary pressure builds up on the economy. The fiscal policy can be used by the government to restore the desired level of GDP. In such a situation, the government may postpone to restore the desired level of GDP. In such a situation, the government may postpone or cut down its expenditure and increase the trades of taxes or withdraw tax rebates and concessions. As a result, the desired aggregate spending falls and the level of output, employment and income (GDP) also come down to the desired level.


Related Discussions:- Explain fiscal policy

Energies of the diametric molecules of a gas, Energies of the diametric mol...

Energies of the diametric molecules of a gas, chemistry assignments The analysis basis for treating these different types of motion can be seen by describing the motion of a di

Theory., ExplainBainlimitpricetheory

ExplainBainlimitpricetheory

Neoclassical economics, In neoclassical economics, equilibrium exists when ...

In neoclassical economics, equilibrium exists when supply equals demand for a particular commodity. General equilibrium is a special (purely hypothetical) condition in which every

Four-firm concentration ratios , a) The four-firm concentration ratios for ...

a) The four-firm concentration ratios for the following industries have been found from the Economic Census for Manufacturing (NAICS 31-33) as follows. The four-firm concentration

Intermediate microeconomics, show that the necessary and sufficient conditi...

show that the necessary and sufficient conditions for consumer equilibrium under both cardinal and ordinal utility theories are identical .

Arbitrage pricing theory, Arbitrage pricing theory is between one of two in...

Arbitrage pricing theory is between one of two influential economic theories of how assets are formed or priced in the financial markets and the other model is the capital asset pr

Show the impact on price elasticity of demand, Q. Food purchases are relati...

Q. Food purchases are relatively price inelastic since food is a necessity. If food is so required for life, how will we explain the heavy advertising of food items at the

Markets, Syndicated and organized oligopoly

Syndicated and organized oligopoly

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd