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What is the best way to define Fiscal Policy?

Posted on by Jon Ane

Fiscal policy is a means that uses government spending and taxation tools in a bid to make a needed impact on a given economy. Fiscal policy is based on the ideas of Keynes, who claimed that governments could stabilise and contribute to the economic output, including aspects such as employment, inflation, demands for goods and services and others. In addition to the governmental tools, the central bank’s monetary policy tools could be part of the fiscal policy.

There are two types of fiscal policy:

  1. Expansionary fiscal policy – decreases tax rates or increases government spending in a bid to upsurge demands and trigger economic growth. Widely used during a recession.
  2. A contractionary fiscal policy –  increases tax rates or decreases government spending to prevent or reduce inflation.

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