How can fiscal policy affect inflation?
1 Answer
The fiscal policy has the power to affect the level of overall demand in the economy. The primary objective of fiscal policy is to maintain the price stability, economic growth and employment of the country. Hence an appropriate fiscal policy help in combating rising inflation rates, an inappropriate fiscal policy may have an opposite impact on inflation, actually triggering a rise.
Explanation:
The fiscal policy is basically the revenue generating policy of the Government. The government finances expenditures on the basis of this fiscal policy. The two methods of financing are borrowing and taxation.
A government not having sufficient tax revenue to finance its expenditure, borrows money to provide goods and services to it's people. The government borrows money through the issuance of securities.
Impact of fiscal policy
The fiscal policy influences interest rates, tax rates and government spending strategy. Fiscal Policy has the power to affect the level of overall demand in the economy. The primary objective of fiscal policy is to maintain price stability (inflation), economic growth and curb down employment of the country. Hence an appropriate fiscal policy can help in combating rising inflation rates.
