How can fiscal policy be effectively used at the time of depression ?

1.	How can fiscal policy be effectively used at the time of depression ?
Answer» When deficient demand appears during depression, i.e. Aggregate Demand is less than the Aggregate Supply. In this situation, government adopts a suitable fiscal policy. Government increases public expenditure like-road building, dam construction, building of schools and hospitals to raise the income as well as demand. Similarly, taxes are reduced to increase the consumable income of the consumer. These efforts remain fruitful when government does not increase the taxes. During depression, fiscal policy proves more successful than monetary policy. During depression, producers already have a large stock of unsold goods, so, even at a reduced rate of interest, they are not motivated to invest more. Therefore, through this policy, government tries to bring Full Employment and price stability through changes in taxation and government expenditure.

Answer»

When deficient demand appears during depression, i.e. Aggregate Demand is less than the Aggregate Supply. In this situation, government adopts a suitable fiscal policy. Government increases public expenditure like-road building, dam construction, building of schools and hospitals to raise the income as well as demand.

Similarly, taxes are reduced to increase the consumable income of the consumer. These efforts remain fruitful when government does not increase the taxes. During depression, fiscal policy proves more successful than monetary policy. During depression, producers already have a large stock of unsold goods, so, even at a reduced rate of interest, they are not motivated to invest more. Therefore, through this policy, government tries to bring Full Employment and price stability through changes in taxation and government expenditure.

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