1. a. What is fiscal policy? What kind of fiscal policy is needed to reduce unem
ID: 1217442 • Letter: 1
Question
1. a. What is fiscal policy? What kind of fiscal policy is needed to reduce unemployment problem?
b. What is monetary policy? What kind of monetary policy is needed to fight inflation problem?
2. Write an essay on debt and deficit and include answers to the following in your essay:
a. What is budget deficit and how is it related to Government debt?
b. What is cyclical adjustment to deficit and how does it help to understand the stance of fiscal policy?
c. What is crowding out? How does budget deficit crowd out investment?
d. Why a high level of government debt is a matter of concern?
Explanation / Answer
1.
a. A fiscal Policy is a policy by which government adjust its spending leveles and tax rates to monitor and influence a nations economic growth. Expansionary Fiscal Policy is needed to reduce unemployment problem government would do so by decreasing taxes and increasing spending. Lowering taxes eill increase disposable income and increase consumption level leading to an increase in aggregate demand. Increase in aggregate demand will further esclates to rise in production levels which will further increase the demand for the workers and hence will helps in reducing unemployment.
b. Monetory Policy is a policy used by monetory authorities, to control the money supply in the economy through their control over interest rates in order to maintain price stability and controlling economic growth. Contractionary Monetory Policy is being used to fight rising inflation as it aims to reduce the money supply in the system by increasing the interest rates and increasing the reserve requirement. Increase in interest rates and reserve requirement will make borrowing money costlier which will decrease the lending by banks and will help in reducing the money supply in the system wioth reduced money supply people will be reluctant to buy more which decrease the demand when demand falls and supply is more the prices of the commodities fall which will reduce overall inflation level in the economy.
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