Definition
Fiscal policy includes decisions about public expenditures, taxation, borrowing, and budget balances.
Political Dictionary
Fiscal Policy
Fiscal policy is the use of government taxes and spending to influence the economy.
Why It Matters
It can affect aggregate demand, employment, inflation, investment, income distribution, and long-term growth.
How It Works
Congress and the president enact tax and spending laws that expand or restrain economic activity.
History
Fiscal policy became especially prominent during the twentieth century with the rise of Keynesian economics and larger public budgets.
Example
During a downturn, government may increase spending or reduce taxes to support demand.
Common Misconceptions
- Fiscal policy is controlled by the Federal Reserve.
- Every tax cut has the same economic effect.
- Budget deficits always produce immediate inflation.
Related Terms
Related Topics
See Also