ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Since taxes reduce income, and income influences spending, the government can influence the amount of spending in the economy by changing the tax rate. If the government raises the income tax rate, people pay a higher portion of their income in taxes-which means they have less income to buy goods and services.

Detailed explanation-2: -Business cycles are the “ups and downs” in economic activity, defined in terms of periods of expansion or recession. During expansions, the economy, measured by indicators like jobs, production, and sales, is growing–in real terms, after excluding the effects of inflation.

Detailed explanation-3: -The government has two tools at its disposal to moderate the short-term fluctuations of the business cycle-fiscal policy or monetary policy. Fiscal policy refers to changes in the budget deficit. Monetary policy refers to changes in short-term interest rates by the Federal Reserve.

Detailed explanation-4: -main factors contribute to changes in the business cycle: business decisions; interest rates; consumer expectations; and external issues. When businesses increase production, they increase aggregate supply and help fuel an expansion. When they decrease production, supply decreases and a contraction may result.

Detailed explanation-5: -Fiscal policy is the means by which the government adjusts its spending and revenue to influence the broader economy. By adjusting its level of spending and tax revenue, the government can affect the economy by either increasing or decreasing economic activity in the short term.