Fiscal Policy
Fiscal policy is based on the theory of British economist John Maynard Keynes, who states that increases and decreases in income (taxes) and expenditures (expenses) affect inflation, employment, and the flow of money through the economic system. I'm here. Fiscal policy is often used in conjunction with monetary policy set by the US Federal Reserve to influence the direction of the economy.
Fiscal policy is paramount to a successful economy, as taxes, spending, inflation, and employment all contribute to Gross Domestic Product (GDP). This figure shows the value of goods and services that the country produces in his year.
Types of Fiscal Policy
There are two main types of fiscal policy:
- expansionary
- contractionary
Expansionary fiscal policy:
Expansionary fiscal policy aimed at stimulating the economy is most often deployed during recessions, periods of high unemployment, or other periods of weak economic cycles. That means the government will spend more money, cut taxes, or do both.
The aim of expansionary fiscal policy is to keep more money in the hands of consumers so they can use it to stimulate the economy. In economic terms, the goal of expansionary fiscal policy is to support aggregate demand when private demand falls.
Contractionary fiscal policy:
Contractionary fiscal policy is used to slow economic growth, for example when inflation is skyrocketing. Constriction fiscal policy, the opposite of expansionary fiscal policy, raises taxes to reduce spending. When consumers pay more taxes, they spend less money, slowing economic stimulation and growth.
Due to the contractionary fiscal policy, the economy usually grows only 3% per year. Exceeding this growth rate can have negative effects on the economy, including inflation, asset bubbles, rising unemployment, and even recessions.
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