Fiscal Policy

What is Fiscal Policy? Fiscal policy refers to the use of the federal budget—taxing, spending and borrowing— can be used to influence the economy (i.e. change the level of total spending in the economy) Fiscal policy is shaped mostly by Congress and the President Fiscal policy is influenced by political ideology and view of the appropriate scope of government

Government Taxation Funds raised through taxing and borrowing to pay for government expenditures. The amount of government taxation depends on a number of factors including Political ideology The political climate The state of the economy

Government Spending Goods and services provided by government and paid for by taxing and borrowing. Federal government expenditures include national defense and a system of justice. State and local government expenditures include police, roads and public education. The amount of government spending depends on a number of factors including political ideology, the state of the economy and the political climate.

Uses of Fiscal Policy In the short term, fiscal policy can be used to reduce the extremes of recession and inflation. If the economy is in recession, then an EXPANSIONARY fiscal policy can increase aggregate demand through some combination of tax cuts and/or spending increases. If an economy is suffering inflation, then a CONTRACTIONARY fiscal policy can reduce aggregate demand through some combination of tax increases and/or spending cuts.