Fiscal Policy and the Goverment Theory

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QUESTION 3 Fiscal policy refers to the government’s handling of the budget. Usually fiscal policy is about spending as much as possible, thereby stimulating the economy,without necessarily raising taxes.

In other words Fiscal policy involves the Government changing the levels of Taxation and Govt Spending in order to influence Aggregate Demand (AD) and therefore the level of economic activity. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Aggregate demand is the total demand for final goods and services in the economy at a given time and price level]It is the amount of goods and services in the economy that will be purchased at all possible price levels This is the demand for the gross domestic product of a country when inventory levels are static. inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – loss of real value in the internal medium of exchange and unit of account in the economy. Inflation is largely dependent on supply and demand pressures in the economy. High rate of inflation is a situation where general price level within a specific economy increases rapidly.

Under high rate of inflation the general price level could rise by 5 or 10% or even much more every day. Although every government strive to keep inflation in check and unemployment under control, several factors may come to play which may increase inflation and unemployment. These factors may include excessive.

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