Fiscal Policy

Fiscal policy is what the government (legislative and executive) does with taxes and spending to influence the economy. It relates to government spending, lowering or increasing taxation, and public services, as well as some regulations on banking or money.

There are two main types of fiscal policy

• Expansionary fiscal policy
  • Higher government spending (Boosted economy) and or lowered taxes
  • Increases aggregate demand (for money)
  • Used in recessions to support growth and employment
• Contractionary fiscal policy
  • Lower spending and/or increased taxes
  • Decreases demand
  • Used in periods of high inflation, reduce deficits.