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When any government uses the fiscal policy as an instrument for Economic stability of the country, this fiscal policy should be contra-cyclic in nature.
1) The government can rise the level of employment, income and economic activity by resorting to a deficit budgeting (more expenditure than the income from taxes). this is called as an expansionary fiscal policy.
2) conversely, government can resort to the contractionary policy by contracting the employment and income by the surplus budgeting (tax income is more than the expenditures).
To use the fiscal policy as an instrument for economic stability, the government should keep in mind the above mentioned courses of actions in different economic scenarios (Inflation and deflation).
INFLATION.
If for example there is an inflationary condition in a country, the foremost step of the government should be to check the money in circulation at its part. it should go for a surplus budgeting and therefore it will contract the employment and reduce the disposable income with the public. If the step of government is the opposite one it ll lead to severe price hike.
DEFLATION.
In deflationary condition the government should induce more income into the market by stimulating the employment thereby resuming the economic activity. If at this stage the government shows reluctance in resuming the economic activity the economy of that particular nation will face depression, which is in no sense in the favour of a nation.
If a suitable fiscal policy is employed in Inflation and Deflation, these fiscal policies are called as CONTRA-CYCLICAL FISCAL POLICIES.
Wiki User
∙ 13y ago
Contracyclical fiscal policy involves government spending and taxation measures that run counter to the current economic cycle. During economic downturns, the government increases spending or cuts taxes to stimulate the economy. Conversely, during economic booms, the government reduces spending or raises taxes to prevent overheating and inflation.
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