Question

Briefly explain the role of fiscal policy in an economy.

Answer 1

Fiscal policy is the policy used by the government in order to control the level of aggregate demand in the economy. There are two important tools of the fiscal policy used by the government, namely tax rate and the government expenditure. During the lower level of aggregate demand where the economy faces a situation of recession, the government uses the expansionary fiscal policy which involves decreasing the tax rate and increasing the government expenditure. On the other hand, when the economy is in the face of boom and faces the possibility of inflation then the government uses the contractionary fiscal policy which involves increasing the tax rate and decreasing the government expenditure. So, we can say that fiscal policy is a tool of controlling the level of aggregate demand and keeping the economy on the track.