All About Fiscal Policy

The United States government directs fiscal policy with the goal of maintaining a healthy economy.

What is Fiscal Policy?   

Fiscal policy is the use of public expenditure and taxation to affect the economy, particularly macroeconomic conditions. These include employment, inflation, economic expansion and the total demand for goods and services. The government may reduce tax rates or boost spending during a recession to boost demand and the economy. On the other hand, it can increase rates or reduce spending to slow down the economy in order to battle inflation. Monetary policy, which is implemented by central bankers rather than elected government officials, is sometimes contrasted with fiscal policy.  

Economic Factor of Fiscal Policy: -  

The GDP is one of the metrics that are frequently used to assess an economy's performance. Aggregate demand or the total amount of goods and services produced by a country and bought at a particular price point, is another determinant. According to the aggregate demand curve, demand for products and services increases when prices are lower and decline when prices are higher. These metrics are impacted by fiscal policy, which aims to sustainably boost GDP and aggregate demand.  

Policy tools of Fiscal Policy: -  

Taxes and spending are the two primary fiscal policy instruments. By dictating how much money the government must spend in specific sectors and how much money people should spend, taxes have an impact on the economy. For instance, the government may lower taxes to encourage consumer spending.   

Conclusion: -   

The United States government directs fiscal policy with the goal of maintaining a healthy economy. Adjustments to tax rates and government spending are two tools used to promote beneficial economic activity. When economic activity slows or worsens, the government may try to boost it by lowering taxes or increasing spending on various government programmes.   

When the economy is overly active and inflation threatens, the government may raise taxes or cut spending. However, neither option is appealing to politicians looking to stay in power. In such cases, the government looks to the Fed to implement monetary policy to reduce inflation.