13 July 2013
Fiscal policy is an instrument in the hands of government for reallocation of resources according to nation’s priority, redistribution, promotion of private savings & investments & the maintenance of stability. An expansionary fiscal policy means more investment spending on part of government. This increases the interest rates in the economy because government resort to borrowings to finance the expenditure. When interest rates rise, they cause private investment to fall. This phenomenon is called "Crowding out of private investment". A contractionary fiscal policy means less expenditure by government, which hampers the economic growth of a country. So the government has to strike a balance between growth prospects & crowding out.
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