Is Fiscal Policy Flexible Regarding Changing Economics?

Difficult economic times call for challenging decisions that can affect retailer business in a country. For instance, during an economic recession with increased unemployment rates, central banks may boost the economy by inducing an expansionary money policy to expand the money supply, raise loans, and reduction in interest rates. However, inflation causes when the prices of goods and services are extraordinarily high, the same central bank can stimulate the economy by applying contractionary monetary policy by lowering the supply of money to the economy and reducing the leveraging of loans through increased interest rates. Conversely, apart from central banks taking responsibility for the economy, the government may act by regulating the amount spent on the economy and tax revenues given to business enterprises.

To respond to tough economic times such as recession and unemployment, the government may increase the aggregate demand for goods and services, in the retailer sector, by increasing the spending or lowering the amount of taxes imposed on the retailer sector. As such, the consumption of retailers’ products increases because of elevated disposable income through cuts in individual income taxes or payroll taxes. In addition, the move is established to raise investment spending by increasing after-tax profits through cuts in the retailer sector’s taxes. Moreover, the retailers may benefit from an increased expenditure by the government on final goods and services because of increased government purchases.

In contractionary fiscal policy, especially during price inflation affecting retailers’ businesses because of upward pressure on salaries and wages, the government can decrease the degree of aggregate demand by cutting spending and increasing taxes. Consequently, this reduces the upward pressure on consumer prices. Notably, the inflated prices reduce, and the retailer’s business reverts to normal demands.

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