1. Can fiscal policy changes be instituted in a manner that will reduce economic fluctuations? Explain.
A fiscal policy is the use of government expenditures and taxes to influence the level of economic activity. Fiscal Policies can be used in an effort to close a recessionary or an inflationary gap reduce the economic fluctuations. During a recession , government should increase spending in order to increase the demand for goods and lower taxes in order for households to have more income to spend on goods and services.During a inflationary economy, government should increase taxes which would reduce the money supply for households and lower government spending which will drive down the demand for goods and services which will eventually cause a decrease in prices.
Although fiscal policy seems as if it can correct these economic fluctuations immediately, there are certain lags it is faced with. The first one is the recognition time lag, where it takes time for the persons to get information about the economy to tell whether it is in a recession or inflation. Administrative time lag, where it takes time for them to put the fiscal policy into effect. Operational lag, the time it takes for the onset policy to have a effect on the economy.
2. Will increases in government spending financed by borrowing help promote recovery from a recession? Why or why not?
No. A recession is defined as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.Borrowing of funds from other countries would be a short term solution to the problem . In the long run, the government’s expenditure might exceed the revenue of the country which will lead to higher interest payments and tax rates.Investment would also be ...
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