Question

Give two examples of fiscal stimuli and explain why/when a government would use these. Explain how corporate tax cuts could be an engine for economic growth.

Answer 1

The discretionary policy of the government is called the fiscal policy and two major fiscal stimuli are reduction in taxes and increase in government expenditure on goods and services. Government uses these tools of fiscal policy when the economy is experiencing a recession. At this time there is a decline in the income of consumers and household so that the real output is reduced. To stimulate consumption and other spending, taxes are reduced and and the government spending is increased

A corporate tax can be reduced in order to stimulate investment spending. Greater investment will result in capital accumulation which is considered as an important factor in growth of the economy. Therefore corporate tax cuts can be the engine of the economic growth.