Suppose that fiscal policy changes output faster than it changes the price level

Question

Suppose that fiscal policy changes output faster than it changes the price level. How might such timing play a role in the theory of political business cycles? Is this a valid role for fiscal policy? Discuss

Explanation / Answer

the fiscal policies mainly comprises of government expenditure and taxes. if govt exp increases and tax rate is reduced it is known as expansionary fiscal policies whereas when the govt decreases its exp and increase the rate of taxes to garner more revenue it is know as the contractionary fiscal policies. now given to suppose that fiscal policy changes output faster than it changes the price level that is dY/dG > dP>dG where G is the govt exp and Y is the output level and P is the price level , then this will definitely led to the growth with boom of the economy. actually speaking this is not the valid role of the fiscal policy as also referred by Sir John Keynes that fiscal policies are mainly responsible to take the economy out of the recession or depression by applying expansionary fiscal policies by the government through the government interferences even in most of the market capitalists economies.

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