Fiscal Policy

October 7, 2022

Fiscal Policy is the policy in which the government attempts to contain the economy through adjusted spending levels and tax rates. This policy uses the theory that the government can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence curbs inflation increases employment, and maintains a healthy value of money. Healthy inflation is generally considered 2-3%. The idea behind fiscal policy is to find a balance between tax rates and public spending. For example, to stimulate a stagnant economy, the government could choose to increase spending or lower taxes. This would put more money into the economy which will increase consumer demand.

The effects of fiscal policy vary from person to person depending on the political orientations and goals of the policymakers. For example, a tax cut could affect only the middle class, which is typically the largest economic group.

Fiscal policy differs from monetary policy in that monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve. Fiscal policy, as stated earlier, deals with the taxing and spending of the government.

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