Fiscal Policy Role in Economy Stabilization and Its Effectiveness

FISCAL POLICY ROLE IN ECONOMY STABILIZATION AND ITS EFFECTIVENESS 1
FISCAL POLICY ROLE IN ECONOMY STABILIZATION AND ITS EFFECTIVENESS
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FISCAL POLICY ROLE IN ECONOMY STABILIZATION AND ITS EFFECTIVENESS 2
Discussion
Fiscal policy refers to a means of controlling the economy of a given nation by its government.
The nation’s government adjusts its level of expenditure and the prevailing tax rates in its
economy in order to monitor and also influence the performance of the economy. Therefore,
fiscal policy is a very crucial instrument in stabilizing a nation’s economy. A given economy is
said to be stable if the recession is overcome and the prevailing inflation level in the economy
controlled accordingly (inflation kept stable and at the lowest rate possible). Generally, there are
two types of fiscal policies namely the discretionary and non-discretionary fiscal policies
(Easterly and Rebelo 2014, p.417). Discretionary fiscal policy aims at influencing a nation’s total
output and the general price for goods and services. It mainly aims at manipulating the aggregate
demand for goods and services within the nation. Non-discretionary fiscal policy aims at
automatically raising the aggregate demand when a recession occurs and lowering aggregate
demand in case inflation rises in the economy. This is made possible through the automatic built-
in tax and expenditure mechanism without deliberate actions by a nation’s government.
The most commonly used fiscal policy by various governments is the discretionary fiscal policy.
The discretionary fiscal policy can be tailored to expand or contract some key economic
performance indicators such as inflation to achieve the desired economic measures. During the
recession period, the economy of a given nation is said to be experiencing decreased aggregate
demand as the nation’s investment falls. This is due to the fact that many investors are
pessimistic about the future as far as profit making is concerned. This, therefore, makes the
overall marginal efficiency of investment to decline leading to the creation of a recessionary gap
in the economy as the aggregate demand curve shifts downwards. The government can overcome