1) Fiscal Policy: Use of government spending and taxes to regulate economic activity. All levels of government conduct fiscal policy. The two main instruments of fiscal policy are government spending and taxation.
The main objective of fiscal policy is to move the economy towards its full employment level of income without inflation.
Following are the economic goals of fiscal policy:
1. To combat Inflation: If the economy is experiencing inflation without unemployment, the appropriate fiscal policy is to decrease government spending or increase taxes, or a combination of two actions. This type of fiscal policy is called contractionary fiscal policy.
2. To combat unemployment: If the economy is experiencing a recession with high unemployment and no inflation, the appropriate fiscal policy is to increase government spending or decrease taxes, or a combination of both actions. This type of fiscal policy is called expansionay fiscal policy.
2) Non-discretionay Fiscal Policy (Built-in –stabilization) : It refers to the measures that have been built into the economic system. They operate automatically to increase the budget surplus(T>G) in inflationay periods and increase the budget deficit (G>T))in periods of recession. They tend to stabilize the economy. Examples are: Progressive taxes, government assistance to agriculture and employment insurance.
Discretionary Fiscal Policy : Deliberate changes in government spending and taxes to achieve desired economic objectives. There are two types of discretionary fiscal policy.
Contractionay Fiscal Policy: Decrease in government spending and increase in taxes that result in a reduction in aggregate expenditure. This is appropriate fiscal policy to eliminate the inflationary pressure.
Expansionay Fiscal Policy: Increase in government spending and decrease in taxes that result in an increase in aggregate...