Fiscal Policy

Fiscal policy involves the utilization of government spending and altering tax revenue to influence a number of economic aspects such as the level of aggregate demand, the redistribution of income and wealth, and the allocation of resources.

Roles and Objectives of Fiscal Policy

The roles and objectives of fiscal policy vary in different states. However, the primary aim is to manage the economy by influencing the aggregate output (real GDP). It is imperative to note that the objectives of fiscal policy change with the level of economic development. Some of these objectives are discussed below.

Price Levels

The fiscal policy ensures an attractive price level in a country. Consequently, this implies that the costs and prices reach a level where employment and production are maximized.

Controlling Inflation

When expenditures of non-productive projects are lowered, or taxes are raised, the demand for goods and services decreases. As a result, fiscal policy acts as a significant inflation rate control alternative.

Encouraging Investments

Providing a conducive environment for businesses and consumers, for instance, by reducing taxes, encourages investments. This moves capital from less productive to more productive sectors, consequently enabling a country’s resources to be fully utilized.

Reducing the Regional Disparities

In most emerging economies, some provinces or states experience more development than others. It is, therefore, the responsibility of the government to initiate the infrastructural development of the underdeveloped areas. Also, the government might provide less developed areas with tax breaks to boost the per capita income.

Increasing Industrial and/or Agriculture Output

Fiscal policy can influence certain sectors of the economy in direct or indirect ways. For example, some policies have a direct impact on the value of land in the agricultural sector. Also, the agricultural sector is very capital-intensive. A good fiscal policy can affect the relative demand and competitiveness of exports for agricultural products. Therefore, fiscal policy can be used to increase the output of some sectors of the economy.

Controlling Consumption

A country cannot improve its economic position without increasing investments. If the consumption rate rises too rapidly, then savings and investments automatically drop. Therefore, the fiscal policy comes in and plays a supervisory role over the consumption rate.

Ensuring Equal Distribution of Resources

The purchasing power increases with a fair distribution of resources among different classes of society. This leads to high levels of production, which lowers the unemployment level.

Question

A good fiscal policy should least likely:

A. encourage investments;

B. increase regional disparities; or

C. control inflation.

Solution

The correct answer is B.

Good fiscal policies should aim at decreasing regional disparities. In most emerging economies, some provinces or states experience more development than others. It is therefore the responsibility of the government to initiate the infrastructural development of the underdeveloped areas.

Options A and C are incorrect. Encouraging investments and controlling inflation are roles of fiscal policy.

 Reading 16 LOS 16o:

Describe roles and objectives of fiscal policy