Function of fiscal policy

Answer 1

Fiscal policy is the government using its tools to influence the welfare of the economy. It does this by either government spending or taxation. It is used when trying to manipulate the macroeconomic welfare of the economy. It can practice expansionary policy in which the government expenditures are greater than the taxes it receives. The government will have a budget deficit. The government can do this by increasing government spending or decreasing taxation, which increases the amount of money to households. It can also practice contractionary policy in which the government expenditures are less than the taxes it receives. The government will have a budget surplus. The government can do this by decreasing government expenditure or increase taxation, which decreases the amount of money to households.

These tools are used when the government or administration feels like it should step in to either decrease economic activity or increase economic activity. It would want to decrease economic activity in order to decrease inflation. It would want to increase economic activity in order to avoid decreasing aggregate demand, or aggregate economic activity by households. These policies essentially force people to work and force businesses to hire. This is the situation the world is currently in, where economic activity, transactions between businesses and households is stagnant. This leads to huge numbers in unemployment causing a gap in aggregate demand (no one is able to buy anything because they don't have a job to afford things), then firms cannot produce more because no one is buying anything. The logic is when all else fails the government needs to step in to spur economic activity in order to avoid a recession or depression.