Explain how fiscal policy is used to achieve economic stability.

In order to achieve a stable economic condition, fiscal policy has to play a positive and constructive role both in developed and developing nations. The specific role to be played by fiscal policy can be discussed as follows: 

To act as optimum allocator of resources: As most of the resources are scarce in their supply, careful planning is needed in its allocation so as to achieve the set targets.

Rational allocation would ensure fulfillment of various objectives. To act as a saver:
1. It should follow a rational consumption policy reduces the MPC and raises the MPS.
2. Taxation policy has to be modified to raise the rates of old taxes, introduces new
additional taxes, and extends the tax-nets.
3. Profit earning capacity of public sector units are to be raise substantially to mop-up financial resources.
4. The government should borrow more money both in the country and outside the country.
5. Higher the rate of interest are to be offered for government bonds and security.

· To act as an investor: Mere mobilization of financial resources is not an end in itself. It should result in the creation of real resources which are more important in accelerating the growth process. Rapid economic growth depends upon the volume of investment.
Hence, fiscal policies have to be ensuring higher volume of investment in both private and public sectors.

· To act as price stabilizer: price stability is of paramount of importance in an economy.Extreme levels of both inflation and deflation would disrupt and disturb the normal and regular working of an economic system. This would come in the way of stable and persistent growth. Hence all measures are to be taken to check these two dangerous situations so as to create necessary congenial atmosphere to prepare the background for rapid economic growth.

· To act as an economic stabilizer: Price stability would create the necessary background for over all economics stability. Upswing and downswing in the level of economic activities are to be avoided. If an economy is subject to frequent fluctuation in the form of trade cycle, certainly, it would undermine and disturb the growth process. Instability would come in the way of persistent and consistent growth in a country. Hence all measure to be taken to ensure economic stability.

· To act as an employment generator: Fiscal policy should help in mobilizing more financial resources, convert them in to investment and create more employment opportunity to absorb the huge unemployed man power.

· To act as balancer: There must be proper balance between aggregate saving and aggregate investment, demand and supply, income and output and expenditure, economic overhead capital and social overhead capital etc. Any sort of imbalance would result in either surpluses or scarcity in different sectors of the economy leading to fast growth in some sectors followed by lagging of some other sectors.

To act as growth promoter: The basic objective of any economic policy is to ensure higher economic growth rates. This is possible when there is higher national savings, investment, production, employment and income. Hence, fiscal policy is to be designed in such a manner so as to promote higher growth in an economy.

· To act as in come redistribute: Fiscal policy has to minimize inequalities and ensure distributive justice in an economy. This is possible when a rational taxation and public expenditure policy is adopted. More money is collected from richer section of the society through various imaginative taxation policies and a larger amount of money is to be spent in favor of poorer sections of the society. Thus, inequality is to be reduced to the minimum.

· To act as stimulator of living standards of people: the final objective is to raise the level of living standards of the people. This is possible when there is higher output, income and employment leading to higher purchasing power in the hands of common man. Hence, fiscal policy should help in creating more wealth in the economy. If there is economic prosperity, then it is possible to have a satisfactory, contended and peaceful life.

Thus, fiscal policy has to play a major role in promoting economic growth in a country.