Question

"To implement fiscal policy the government has at its behest several instruments which include taxation, government expenditure and public borrowing' Comment.

Short answer

To summarize, the government uses three main instruments to implement fiscal policy: taxation, government expenditure, and public borrowing. These instruments help the government achieve macroeconomic objectives such as economic growth, low inflation, and reducing unemployment. Taxation influences aggregate demand and can be used to encourage specific behaviors, while government spending impacts the economy directly through infrastructure investments and social programs. Public borrowing allows the government to finance budget deficits and inject additional resources into the economy during downturns, but excessive borrowing can have negative long-term consequences. The government must choose the appropriate instruments and strategies to effectively influence the economy and reach its desired objectives.

Step-by-step solution

Introduction to Fiscal Policy Instruments

Fiscal policy refers to the use of government spending, taxation, and public borrowing to influence the economy. Governments can use these tools to achieve various macroeconomic objectives such as economic growth, low inflation, and reducing unemployment. In this exercise, we will explore each instrument and how they are employed in fiscal policy.

Taxation

Taxation is the primary source of government revenue. This includes income taxes, corporate taxes, sales taxes, and other kinds of taxes. Governments use the tax system to influence the distribution of income, to encourage or discourage certain activities, or to stabilize the economy. By changing the tax rates or structure, the government can influence the overall aggregate demand in the economy. For example, during a recession, a government might reduce income taxes to encourage more consumer spending and stimulate economic growth.

Government Expenditure

Government spending is another major component of fiscal policy. This includes spending on infrastructure, social programs, defense, and other government operations. By adjusting its spending, the government is directly influencing the aggregate demand in the economy. Increased government spending can stimulate economic activity during a slow economy or in times of high unemployment. Conversely, decreased spending can help reduce inflationary pressures during periods of overheating economic growth.

Public Borrowing

Public borrowing, or the issuance of government bonds, is a tool used by governments to finance their budget deficits. Borrowing allows the government to spend more than its revenue, injecting additional financial resources into the economy. In times of economic downturn, governments can use borrowing to finance stimulus programs aimed at reviving the economy. However, excessive public borrowing can also lead to an increase in interest rates and debt servicing costs, which may hinder long-term growth.

Implementing Fiscal Policy

To understand how these instruments work together in fiscal policy implementation, let's go through the following steps: 1. The government identifies an economic objective (e.g., reducing unemployment or boosting economic growth). 2. It selects the appropriate fiscal policy tool(s). In some cases, a combination of these tools may be employed. 3. The government implements the changes to taxation, government spending, or public borrowing. 4. The implemented policy measures will then affect the economy, influencing the aggregate demand and supply and moving the economy towards the desired objective. 5. The government will monitor the results to ensure that the policy is effective and adjust as needed. In conclusion, taxation, government expenditure, and public borrowing are essential instruments at the government's disposal to implement fiscal policy and influence the nation's economy. By carefully selecting the appropriate tools and strategies, governments can work towards achieving their macroeconomic goals and improving the overall economic performance.