Fiscal Policy

Fiscal policy refers to the use of government spending and taxation to influence the economy. It encompasses decisions made by the government regarding its budget, including how much to spend on public services and investments, and how much to collect in taxes. The main goals of fiscal policy are to manage economic fluctuations, promote economic growth, and achieve full employment while maintaining stable prices.

Fiscal policy can be classified into two main types: expansionary and contractionary. Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic activity, especially during periods of recession or economic downturn. Conversely, contractionary fiscal policy involves reducing government spending or increasing taxes to cool down an overheating economy and control inflation.

The effectiveness of fiscal policy can be influenced by factors such as the economic context, public expectations, and the overall responsiveness of the economy to government interventions. It plays a crucial role in macroeconomic management and is often used in conjunction with monetary policy, which is managed by central banks.