Chapter 29, Problem 1QFR

To determine

To explain:

The effect of counter cyclical fiscal policy on government budget.

Explanation of Solution

Fiscal policy means using of the government budget to stabilize the economy. This involves change in government expenditure and tax volumes. Fiscal policies are found in two forms which are

1. Expansionary, 2. Contractionary and both these two have different effects on government balanced budget.

Effects of Expansionary policy on government balanced budget: The policy is called expansionary when the government makes more expenditure on budgetary subjects such as infrastructure or when the taxes arereduced. Such policies are mainly used to gear up productivity and the economy after all during the recession period.Usually,expansionary policy results in larger budget deficits and consequently creates diversion from balancing the govt. budget.

Effects of Contractionary policy on govt. balanced budget: The policy is called contractionary when government spending is reduced or taxes are increased. Contractionary policies are mainly used to combat rising inflation during boom period in order to bring the economy back. Usually, contractionary policy cuts deficits and hence leads towards balanced budget.

Economics Concept Introduction

Counter cyclical policy:

A counter cyclical fiscal policy is a technique implemented by any government tocontrol boom or recession periods of a business cycle through fiscal measures.These fiscal measures try to stabilize the given economy by working as barrierfor ongoing either boom or recession trends.The counter cyclical fiscal policy influences on government budget balances.