Question

Fiscal policies can work only if private enterprises respond to them in certain way; if they respond in other ways, the policies fail. Explain and give examples.

Answer 1

1. Macro economic stability is facilitated through encouraging aggregate demand and income levels of private sectors or say enterprises in cases of downturn of the economy.

2. For e.g. The amount of tax collections are linked directly to the recurring position of the economy and tend to adjust while stabilising the income levels of private sectors and the aggregate demand.

3. Stabilization also can be a by-product from so called discretionary fiscal policy making wherein the government decides to alter its spending in response to changes in the economy and its activities.