Question

How would you define Fiscal Policy? Who was one of the first Economists to recommend that government become involved in the economy (via fiscal policy)?

Answer 1

Fiscal policy refers to the government policy of affecting government spending and or taxation to regulate the economy. The government increases spending and or decreases the tax as a part of fiscal policy to stimulate the economy and increase aggregate demand. The reverse action takes place when the government wants to stabilize the price level in the economy. Then, spending will decrease and or tax level will increase. It forms to be a fiscal policy, led by the government. Besides, offering benefits and transfer payments as automatic stabilizers, also become the part of fiscal policy.

There are economists such as Adam Smith, proposing government to get involved, but not via fiscal policy. These economists wanted the government to be a moderator or regulator. It is John Maynard Keynes who first proposed that government should bring fiscal policy into action to control the well being of the economy. It happened when US economy oversaw the great depression of 1930s, when government acted very late and relied upon the classical view. Afterwards, Keynes view came regarding the government with a fiscal policy to make strong intervention in the economy.