1What are some difficulties with fiscal policy approach Budg

1.What are some difficulties with fiscal policy approach? (Budget deficit, crowding out, time lags) Explain.

2.How an expansionary monetary policy can help fiscal policy in stimulating the economy? Explain.

Solution

1. The difficulties of fiscal policy approach are as follows:

Fiscal policy are usually introduced to either slow down the spending in an economy or increase the spending in an economy and are referred to as deficit spending and stimulus spending. It is basically increasing or decreasing the tax rate. When there is a change in tax rate this will directly affect the individual and the economy, Without being sure of what percentage of taxes will be levied on people will not be able to spend the entire income and be able to invest. Hence the fiscal policy will start creating uncertainity in the economy.

Budget deficit occurs when the government tries to pump in more money by borrowing money. This will increase the expense of the government and when the government tries to reduce taxes this will directly influence the income of the government there by affecting the government\'s income, This too will cause budget deficit. When taxes are reduced people will start to increase the spending and this will cause in an effect called as crowding out.

These are some of the major difficulties of fiscal policy approach.

2. Monetary policy is a tool that is used by the government to manage interest rates and total supply of money in circulation. Monetary policy is used by the central banks like Federal Reserve. Expansionary monetary policy refers to an increase in the supply of money and a subsequent reduction in interest rates which are used to overcome the problems of a business cycle contraction.

Expansionary fiscal policy is usually complimented by an expansionary fiscal policy because according to expansionary monetary policy any or all of the following might take place, like the government will buy U.S treasury securities through open market operations or try to decrease the discount rate or decrease the reserve requirements. All these will compliment the fiscal policy and hence an expansionary monetary policy will try to compliment the fiscal policy.