Question

What Is Fiscal Policy? Full word page simple summary (Please no plagiarism)

Answer 1

Fiscal policy isussed by the government to control the economy in the form of adjustments in expenditure (government spending) and revenue ( taxation). The government increases or decreases spending and taxes to bring the eocnimy back to steady growth. Fiscal policy is complementary to the monetary policy used by the central bank (money supply, interest rates).

There are three types of fiscal policy:

1. Neutral fiscal policy: This is undertaken when the economy is neither in recession nor in expansion. So in order to keep the economic activity the same, governement spending almost equals government revenue. The economy remains constant.

2. Contractionary fiscal policy: Fiscal policy is contractionary when the revenue is higher than government spending. That is, when the government budget is in surplus or there is a decrease in government budget deficit. This is normally done during recession.

3. Expansionary fiscal policy: A fiscal policy is expansionary when the government spending is higher than its revenue from taxes. This strategy will slow economic growth if the economy is under inflationary trend. Government spends on welfare activities or infrastructure on one hand and gives tax cuts to its citizens on the other.

The objective of fiscal policy thus, is to promote healthy economic growth. For achieving this objective, government makes use of tools like taxes to collect revenue and government spending in the form of subsidies, welfare activities, etc. When there is economic growth of around 3%, inflation of around 2% and unemployment at natural rate of around 3%, economy is said to be experiencng healthy gowth. In the imbalnce of any of these factors, teh government will undertake contractionary or expansionary fiscal policy.