Fiscal Policy as an Economic Stabilization Measure

FISCAL POLICY AS AN ECONOMIC STABILIZATION MEASURE Fiscal Policy refers to the various decisions undertaken by the government regarding public expenditures and revenue. There are a large number of sub-policies that are encompassed by the fiscal system. But all the policies can be broadly categorized as being either ‘Public Expenditure’ or ‘Public Revenue’. It can be said that the fiscal policy is a direct government intervention in the economic processes of an economy. The fiscal policy is very objective in nature, since it creates decisions that can be uniformly applied to the entire economy or to a segment of the economy. The fiscal policy is considered to be more direct than the monetary policy in its impact on the economy.†¦show more content†¦However, it should be noted that the increase in the interest rate has brought about a disincentive for the private sector within the economy. The private investors are dissuaded from borrowing the investible funds lying with the financial system, since the ROI is too high and so unattractive for them. Had the shifting of the IS curve not caused the interest rate to rise (i.e., the ROI was fixed at OI1), then given the new IS situation, the economy would have been at equilibrium at E3 and the income would have risen to OY3. Thus, we see that an expansionary fiscal policy has reduced the possibility of creating income up to OY3 – hence, Y2Y3 represents the amount of additional income l ost i.e., the ‘Crowding-out Effect’. Showing the COE with the help of AD function: The fiscal policy, with a constant money supply, is less expansionary than it would have been if the money supply were increased to keep the ROIs constant as income expanded. Hence, the fall in income by Y1Y2 is the crowding out effect. Showing the COE with the help of the PPF: But as soon as an expansionary fiscal policy causes the government spending to increase to g2, the private sector’s spending falls to h2. Therefore, amh2h1 is indicative of the extent of the crowding out effect of the fiscal policy. It is possible toShow MoreRelatedRole Of Politics In Macroeconomics729 Words   |  3 Pagesmitigate economic issues through intervention on monetary, fiscal policies and increased government spending during recessions. Some of these political divisions are based on political alliances and belief structures rather than an impartial macroeconomic analysis. The graphs and formulas are confusing for politicians and lay people with many preferring simple yes or no answers. 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