Answer to Question #82194 in Macroeconomics for iqra

Question

How can fiscal policy counter a recession? Are budget deficits a problem? Is fiscal policy a reliable means for controlling the economy?

Answer 1

Fiscal policy is an effective means of regulating the economy. During the period when the economy enters recession, there is a need for a stimulating fiscal policy: a reduction in tax rates and / or an increase in government spending. These measures are aimed at:

1. Increasing investment (business expansion);

2. The growth of government spending will cope with increasing unemployment. It should be noted that the state should be very weighted to apply the second measure, since there may be a glut of money supply.

Reducing tax rates in the end can lead to the failure of the budget revenues and may cause the budget deficit.

According to McConnell and Brue, in a downturn in the economy, state policy should be aimed at creating a budget deficit (with a balanced budget) in order to level the influence of negative factors. Thus, an economically justified state budget deficit is not a problem. From the above, we can conclude that a properly implemented fiscal policy is an effective lever of economic management since it has a direct and indirect impact on the level of aggregate demand, prices and GDP, as well as on the export position of the state. At the same time, we should note that the correct monetary policy should also complement the fiscal policy.