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Role of Fiscal Policy in Business Cycles

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How should fiscal policy be used to counter business cycles?

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Solution Summary

The solution discusses the role of fiscal policy in minimizing the negative impact of business cycles.

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Any economy may experience contraction, expansion, or peak level. Government spending and taxation power can be used to promote economic stability.

During a slowdown of economic activity (contraction), governments can reduce taxes and lower interest rates. In this case, people's disposable income will increase which as a result, will stimulate consumer spending. In this case, slowdown of the economy may be prevented. A provision of subsidies and incentives in this period to consumers and businesses may also be ...

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