Fiscal Policy Definition
Fiscal policy refers to the use of government revenue collection (taxation) and expenditure (spending) to influence a country’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply. These two policies are used in various combinations to direct a country’s economic goals.
Fiscal Policy Key Points
- Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.
- It is used in conjunction with the monetary policy implemented by a central bank.
- Fiscal policy is primarily used to stimulate economic growth, stabilize prices and reduce unemployment.
- Two main instruments of fiscal policy are government expenditure and taxation.
What is Fiscal Policy?
Fiscal policy is a policy used by the government to influence the economy by adjusting revenue and spending levels. The government uses fiscal policy to stimulate a slowing economy, stabilize prices, or reduce unemployment. This policy is an additional tool for managing the economy in addition to the central bank’s monetary policy.
Why is Fiscal Policy important?
Fiscal policy is important because it determines the amount of government spending and taxes. Through fiscal policy, the government can influence macroeconomic productivity levels, which ultimately lead to changes in economic output and performance. During periods of economic decline, the government can enact expansionary fiscal policies to stimulate growth, while contractionary policies can be used to prevent economic overheating.
Who uses Fiscal Policy?
Fiscal policy is used by the government, specifically, the executive and legislative branches. They decide on taxation levels and government spending. The central bank also plays a role in fiscal policy, as it is responsible for managing the country’s money supply, which can influence fiscal policy.
When is Fiscal Policy used?
Fiscal policy is used when the government seeks to influence the direction of the economy. This typically occurs when the economy is in a recession or experiencing inflation. During a recession, the government may lower tax rates or increase spending to stimulate economic growth. Conversely, during periods of inflation, the government may decrease spending or increase taxes to slow down the economy.
How does Fiscal Policy work?
Fiscal policy works by influencing the amount of money available for businesses and consumers to spend. When the government decides to cut taxes, it leaves businesses and consumers with more money to spend. This can lead to economic growth. On the other hand, if the government increases taxes, consumers and businesses have less money to spend, which can slow economic growth. Similarly, if the government decides to increase its spending, it injects more money into the economy, stimulating growth. Conversely, if the government cuts its spending, it takes money out of the economy, slowing it down.
