What are the main objectives of fiscal policy during a period of deflation?

The main objectives of fiscal policy during a period of deflation are to stimulate economic activity and increase price levels.

During a period of deflation, the general price level in an economy is falling. This can lead to a vicious cycle of decreased spending, lower production, job losses, and further decreases in price levels. Therefore, the primary goal of fiscal policy in such a scenario is to break this cycle and stimulate economic activity. This is typically achieved through expansionary fiscal policy, which involves increasing government spending, decreasing taxes, or a combination of both.

Increasing government spending can stimulate economic activity in several ways. Firstly, it can directly increase demand for goods and services, which can help to push up prices. Secondly, it can lead to job creation, which can increase income levels and boost consumer spending. Thirdly, it can lead to increased investment in infrastructure and other public goods, which can enhance the productive capacity of the economy and support long-term growth.

Decreasing taxes can also stimulate economic activity by increasing the disposable income of households and the after-tax profits of businesses. This can boost consumer spending and business investment, which can help to increase demand and push up prices. However, it's important to note that the effectiveness of tax cuts can depend on various factors, such as the propensity to consume or invest the additional disposable income.

In addition to stimulating economic activity, fiscal policy during a period of deflation also aims to prevent a deflationary spiral. This is a situation where falling prices lead to lower spending, which leads to further price decreases and so on. By boosting demand and pushing up prices, fiscal policy can help to break this spiral and stabilise the economy.

However, implementing expansionary fiscal policy during a period of deflation can have potential drawbacks. For example, it can lead to higher government debt, which can have long-term economic costs. Therefore, policymakers need to carefully consider the potential benefits and costs when deciding on the appropriate fiscal policy response to deflation.

In conclusion, the main objectives of fiscal policy during a period of deflation are to stimulate economic activity and increase price levels. This can be achieved through expansionary fiscal policy measures such as increasing government spending and decreasing taxes. However, the potential benefits of such measures need to be weighed against the potential costs, including the risk of higher government debt.