Fiscal policy?
Answer:
Fiscal policy refers to changes in deliberate changes in taxes or government expenditures.
Taxes will tend to fall during the recession, because incomes are falling. We would not call this "fiscal policy" unless the government took deliberate actions to reduce tax rates. They might do this in an attempt to raise disposable income, and offset the adverse effects of the recession.
Expenditures will tend to rise, because a rise in unemployed workers will take advantage of unemployment benefits and job training programs. We would count this as fiscal policy, since these policies were put into law for this very purpose. Since these programs automatically kick in during recessions, they are called automatic stabilizers.
Overall, we would expect the budget to go into deficit, as taxes fall and expenditures rise. Some government have balanced budget rules. This would require that the government actually raise taxes or cut government wages in order to keep the budget balanced.
balanced budget means what the govt spends = what the govt gets (from tax).
fiscal policy divides into 2, as u already know. the automatic stabiliser, and the discreationary fiscal policy.
automatic stabiliser- during recession : many people with low income thus tax revenue earned will be low. many people will be out of jobs, therefore the unemployment benefits that govt have to pay increases.
this means that spending > revenue.
to still maintain a balanced budget, govt will tax more and stop making new projects or maybe pay cuts to govt servant.
recession will deepen. therefore, usually, the govt will not maintain a balanced budget during recession, but it will carry discretionary budget deficit- spend more than earn. this should boost national expenditure, create jobs and hopefully, the economy will start to pick up.
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