how fiscal policy can be used to slow down an economy that is growing at a rate faster than what is sustainable in the long-term if the policy makers are concerned that such a high growth may create undesirably high rates of inflation in the future.

Question

Lightning

Business

14 November, 14:43

how fiscal policy can be used to slow down an economy that is growing at a rate faster than what is sustainable in the long-term if the policy makers are concerned that such a high growth may create undesirably high rates of inflation in the future.

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Answers (1)

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Clinton Robbins · Answer 1

The answer is by increasing tax rate or reducing its spending or both.

Explanation:

Fiscal policy is the use of government spending and government revenue (tax) to control the economy.

If the economy is growing at a faster rate than what it can sustain in the long run, it means the economy is overheating. All the participants (firms, households, government) are spending heavily.

The government can slow it down by increasing the tax rate of both the households and business. With this, the disposable income of households will reduce and will have lesser money to spend and business profit too will reduce and this will reduce their spending on investments.

Or by reducing its own spending on infrastructure or both at the same time.