ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to cool down the economy.

Detailed explanation-2: -Fiscal policy is defined as the policy under which the government uses the instrument of taxation, public spending and public borrowing to achieve various objectives of economic policy. Simply put, it is the policy of government spending and taxation to achieve sustainable growth.

Detailed explanation-3: -Fiscal policy means using either taxes or government spending to stabilize the economy. Expansionary fiscal policy can close recessionary gaps (using either decreased taxes or increased spending) and contractionary fiscal policy can close inflationary gaps (using either increased taxes or decreased spending).

Detailed explanation-4: -The purpose of expansionary fiscal policy is to boost growth to a healthy economic level, which is needed during the contractionary phase of the business cycle. The government wants to reduce unemployment, increase consumer demand, and avoid a recession.

Detailed explanation-5: -Monetary policy can offset a downturn because lower interest rates reduce consumers’ cost of borrowing to buy big-ticket items such as cars or houses. For firms, monetary policy can also reduce the cost of investment.