ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing. Governments directly and indirectly influence the way resources are used in the economy.

Detailed explanation-2: -The two major fiscal policy tools that the U.S. government uses to influence the nation’s economic activity are tax rates and government spending.

Detailed explanation-3: -There are three types of fiscal policy. They are neutral policy, expansionary policy, and contractionary policy.

Detailed explanation-4: -The tools of fiscal policy are government spending and taxes (or transfers, which are like “negative taxes”). You want to expand an economy that is producing too little, so expansionary fiscal policy is used to close negative output gaps (recessions).