2.How does the fiscal policy influence economic activity? Analyse the impact of Indias fiscal policy on the economy since the beginning of the last decade.The use of Government Spending (GS) and Taxation (TX) to influence the economy is fiscal policy. In considering how fiscal policy influences economic activity it is important to understand it in the Short-Run(SR) and Long-Run(LR). Besides these dimensions, fiscal policy effects on economic activity is expected to impact the Supply-side, Demand-side and Institution-side and is expected to deliver different results for Developed and Developing economies.Fiscal policy impacts: Aggregate Demand(AD) Wealth distribution Economys capacity to produce goods/services. Changes to GS and TX will impact AD in the SR both in terms of scale and pattern. Over time, this impacts the allocation of resources and production capacity. This is so because over time the AD influences: returns to factors of production allocation of capital spending investment in technology human capital developmentTax rates through their influences on net returns to labor, saving and investment also influence the productive capacity.Typically, how the economy reacts to fiscal policy depends on whether the economy is operating at full employment or operating below its capacity. There are two general macroeconomic views namely the Equilibrium view and the Non-Equilibrium view. In the former, the economy quickly returns to full capacity once the disturbances that displaced it from full employment are set right. In this view, both fiscal and monetary policy play negligible role in influencing the economy. In the alternate view, critical market failures take longer to adjust to the disturbances. In such a case, fiscal policy and monetary policy play a major role.