What is Fiscal Policy?
Fiscal policy refers to the government’s use of taxation and spending to influence the economy. It’s one of the primary tools governments employ to manage economic activity and achieve specific macroeconomic objectives such as controlling inflation, boosting economic growth, reducing unemployment, or stabilizing the business cycle. Fiscal policy is implemented through the government’s budgetary decisions, which are typically outlined in annual budgets or economic plans
Key Features of Fiscal Policy:
- Cyclical Adjustments: Fiscal policy can be used counter-cyclically to stabilize the economy during periods of economic downturns or recessions. For example, during a recession, the government may increase spending or cut taxes to stimulate demand and boost economic activity.
- Automatic Stabilizers: Certain fiscal policies, such as progressive income taxes and unemployment benefits, automatically adjust in response to changes in economic conditions. These automatic stabilizers help stabilize the economy by providing support during downturns and restraining growth during booms.
- Budget Deficits and Surpluses: Fiscal policy influences the government’s budget balance, which is the difference between government revenues (taxes and other sources of income) and expenditures (spending).
Difference between Fiscal Policy and Monetary Policy
Governments and banks have ways to manage money and keep the economy stable. Fiscal policy means how governments spend money and collect taxes to help the economy grow. Monetary policy, run by banks, is about controlling interest rates and how much money is available to achieve similar goals.
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