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How fiscal policy solves the macroeconomics problems?

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By Arun Dahal Khatri

Sometimes countries may face various kinds of macroeconomic problems. Whenever countries face such problems a team of economists takes strong and sustainable action to eradicate and overcome the problems. Government makes stable policies with the view to controlling the major economic problems. The ultimate goal of using the macroeconomics policies is to provide a stable economic formation in the nation. There are major three policies that are 
1-Fiscal policy
2-Monetary policy
3- Exchange rate policy
These policies play an active role to control the country's economy in different ways. Fiscal policy is used to control budget deficits by controlling government spending and taxes. Similarly, Monetary policy is used to control unemployment and make stable price modules by managing the interest rates. In addition, the exchange rate policy is used to control the national currency in the foreign market.

The major macroeconomics problems are:
1- Inflation
2-Balance of Payment Deficits
4-decrease meant economic growth

Mainly, today we are taking the fiscal policy and its types to overview 

Fiscal Policy:
It is the strong policy adopted by the government in the annual budget with the view to change the positive economic formation and bring the desired change in the economy. The major tools of fiscal policy are Government Spending(G) and Taxation (T). It is a medium-term policy and the effectiveness of the fiscal policy has been seen after a year of its implementation. The government adopted the fiscal policy by increasing or decreasing tools of fiscal policies( Taxes or Government Spending). Fiscal policy has a close relationship with budget deficits and surplus. Fiscal policy is changeable and it is changed every year after reviewing the results from the previous years.

The main objective of the fiscal policy is to control unemployment by providing employment, obtaining economic growth, controlling the level of inflation, and controlling the overall debt of the nation 

Mainly today we are taking two types of fiscal policies they are:

1- Expansionary or Inflationary fiscal policy: In this policy, government spending is increased and direct taxes are reduced. During the economic problems faced by the government, this fiscal policy generally tends to cut the taxes because cutting the taxes helps the people to keep the money in their pocket and generally they spend more. If the people tend to spend more then it helps to increase the aggregate demand (AD) which is most important for economic growth. In addition, cutting the taxes and increasing government spending help to stimulate investment in the country which is important to control unemployment and the overall economic condition of the country. This fiscal policy is generally used while the country faced economic problems like the recession.

2-Contractionary or Deflationary fiscal policy: This type of fiscal policy is generally used if the economic condition of a country is habitually at its highest points or what We called a boom. Because the unanimous growth and the expansion of the size of the economy can also create economic problems for the nations. That's why economist usually suggests using contractionary fiscal policy to slow down. In this policy Government spending (G) is reduced and taxation(T)increased. Because of the continuous growth, the people will be overwhelmed and that will create economic bubbles and also create inflation that's why government generally adopts this policy to control economic bubbles and control inflation.
After adopting these policies then the government starts to collect more taxes from the people and also deduct the level of government spending. Although the deduction of government spending creates problems in Aggregate Demand and unemployment, it's important to control inflation and economic bubbles.

Key terms of fiscal policies :

Aggregate Demand (AD): it is the sum of the consumption, investment, government spending, and the difference between imports and exports.            

Mathematically, AD=C+I+G+(X-M).

Budget Deficit: The difference between government spending (G) and collecting taxes (T). Mathematically (G-T)