Fiscal policy is spending and taxation of the executive branch of the federal government; in recessionary times, what initiatives in spending and or taxation are going to help the economy?
Fiscal policy is spending and
Fiscal policy is the use of taxation and spending to influence the economy. It determines how much the government spends and taxes and by whom the taxes are paid and where the government is spending. At the macroeconomic level, the fiscal policy has a major impact on AD, income distribution, business cycle, investment and savings, distribution of resources, tax rates, and money supply. The objective of Fiscal policy is to encourage sustainable growth of the economy. These policies were initially adopted during the Great Depression and are based on the theories of Keynes. As per the views of Keynes, the government can stimulate demand by raising the spending and reducing the taxes. On contrary, the policy can also slow down the growth by increasing taxes and increasing spending. There are 2 ways in which FP can be implemented. These are contractionary FP, expansionary FP. It depends upon the government and Central bank of the country which policy needs to be adopted. The government may implement expansionary FP to promote growth during the downturn economy as it will increase the spending especially to increase employment. When there is unusually high economic growth along with full employment, then the government may use contractionary FP by reducing the spending and raising the taxes.
A recession is a phase of contraction of the business cycle when there is a general fall in economic activity. It mainly occurs when there is a huge decline in spending or due to an adverse demand shock. Generally, to respond to the recessions, the governments adopt expansionary macroeconomic policies such as raising the supply of money or raising government spending, or decreasing taxation.
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