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Running Head: ECONOMICS DISCUSSIONS
It is the role of the government to control the economy of its nation. It achieves this
through regulation of unemployment, control of inflation, control of the business cycle and
control of the value of money. Fiscal policy is one of the policies the government uses to
effectively influence the levels of macroeconomic productivities. The policy is very important to
the economy with the idea of balancing between tax rates and the spending levels of the public.
The purpose of fiscal policy is to regulate the economic growth and maintain economic stability,
ensure a stable economic cycle and reduce inflation.
The tools of fiscal policy are divided into two main categories; the automatic stabilizers
and the discretionary (Mbalectures, 2010). Discretionary tools include government spending,
taxation, and transfer payments among others. The idea is to balance these government spending
and tax rates so as to achieve and maintain a stable economic growth. The government can
change its expenditure through reduction or increase of its purchase depending on the nature of
the economy. In addition, the government can increase or decrease taxation rates depending on
the conditions of the economy. On the other hand, automatic stabilizers are the tools that
automatically stabilize the economy. Such tools may include; unemployment allowances,
progressive taxes, and support prices among others.
Some of the major limitations fiscal policy includes forecasting of economic events. It
may be difficult to forecast the correct economic instability. In this case, the correct fiscal
measure, such as the amount of expenditure to be increased, may fail to be met. Another
limitation is the reduction of the national income. Lags such as recognition, decision and impact
also greatly curb fiscal policy. These lags make the process of changing both the government
spending and taxation slow.
Cyclically Adjusted Budget an...
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