Question

Explain what is meant by fiscal policy. Give 2 examples of tools that can be used to implement fiscal policy. What are some of the problems with using fiscal policy?

Answer 1

Fiscal policy is when the government try to stimulate the economy by managing the expenditure in the market or the taxes they are charging to the individual or the business in the market.

the tools of the fiscal policy is the government expenditure and the taxes. A increase or decrease in the defense expenditure is an example of the government expenditure and increase and corporate taxes are example of other taxes.

the main problem with the fiscal policy is that is crowd out the private investment. As the government borrows form the market it decrease the supply of funds and increase the interest rate that will reduce the private expenditure.