Fiscal policy in economics is the use of government spending and taxation to influence a country's economic conditions, particularly macroeconomic factors such as aggregate demand, employment, inflation, and economic growth
. Governments adjust fiscal policy primarily through two tools:
- Changing tax rates, which affects consumers' disposable income and businesses' investment capacity.
- Modifying government spending, which directly impacts aggregate demand by purchasing goods and services or investing in public projects
There are two main types of fiscal policy:
- Expansionary fiscal policy : This involves increasing government spending or cutting taxes to stimulate economic growth, especially during a recession. It aims to increase aggregate demand, reduce unemployment, and encourage investment
- Contractionary fiscal policy : This involves reducing government spending or increasing taxes to cool down an overheating economy and control inflation. It aims to reduce aggregate demand and slow economic growth
Fiscal policy is often contrasted with monetary policy, which is managed by central banks and involves controlling the money supply and interest rates
. Overall, fiscal policy is used to stabilize the economy over the business cycle, aiming for sustainable growth, low inflation, and low unemployment
