Key Concepts Macro - Fiscal Policy (4/5)

• Fiscal refers to government finances - especially how money is raised and spend.
• So when the government lowers taxes and increases spending during a recession, that is fiscal policy in action.
• You can view it as the wallet of the government to keep the economy in balance.

• It is called policy, because it is a planned set of actions or whole strategies to achieve certain goals.
• Often practiced by governments or institutions.

• Generally government spending and taxes are changed.
• Different in expansionary and contractionary strategies:

Expansionary - Used in recessions

• Increase public spending (infrastructure, healthcare)
• Cut taxes (increase in consumption)

Contractionary - Used when inflation is high

• Decrease government spending
• Raise taxes

1. Influences economic growth - stimulate demand and production
2. Affects employment - creating new jobs/increasing unemployment
3. Controls inflation - raising taxes or cutting spending can stabilize prices
4. Impacts budget deficits and national debt - financed by borrowing
5. Redistributes wealth - progressive taxation and social spending

• Meaning:

Fiscal policy is how governments use spending and taxation to manage the economy.

• Application:

It can be expansionary (more spending/low taxes) or contractionary (less spending/more taxes).

• Effects:

Influences growth, inflation, jobs, public debt and can redistribute wealth.