The federal government utilizes a range of fiscal policy instruments to control economic volatility, including inflation and recessions. Inflation is defined as growing prices and a decline in buying power. In contrast, recessions are marked by a decline in economic activity, a fall in consumer expenditure, and a rise in unemployment. Three main instruments of fiscal policy are used to solve these problems.
Tools of Fiscal Policy to Fight the Recession:
Increasing government spending on infrastructure, education, and public services stimulates economic growth and creates jobs, increasing aggregate demand. Higher consumer spending as a result of the increased employment contributes to the economy’s recovery from a downturn.
Tax Cuts: Lowering personal and corporate income taxes gives consumers and businesses more disposable money, stimulating investment and spending, which may boost output and employment.
Transfer Payments: Programs like social assistance and unemployment benefits keep consumption levels stable during recessions by giving impacted people financial assistance and halting a more severe economic downturn.
Tools of Fiscal Policy to Fight Inflation:
Reduced Government Spending: Reducing government spending slows down the economy as a whole, containing price increases and reducing inflationary pressures.
Raising taxes on income and consumption deters consumers from spending and reduces disposable income, which cools the economy and lowers inflation rates.
Reduction of Transfer Payments: Reducing transfer payments decreases household disposable income, reduces consumer expenditures, and eases the pressure on inflation.
Monetary and Fiscal Policy Comparison:
The Federal Reserve administers monetary policy through interest rates and open market operations. This policy aims to stabilize the economy and rein in inflation. Fiscal policy, which is presided over by the President and Congress, governs changes in government expenditures and taxation. Monetary policy modifies the money supply and borrowing costs, while fiscal policy directly affects demand. Both are essential for preserving economic stability and fostering growth.
