What is Fiscal Policy?
- Attempts by the government to meet specific economic goals that can include lowering inflation, unemployment, and increasing GDP.
- Fiscal policy includes increases or decreases in taxes and spending carried out by Congress
- Two types, expansionary fiscal policy and contractionary fiscal policy
- Expansionary Fiscal Policy is where government spending is increased and taxes are cut, that way there is an increase in aggregate demand and it stimulates consumer spending
- Contractionary Fiscal Policy is where government spending is cut and taxes are increased, this decreases aggregate demand and reduces purchasing power
Life Application/Analogy
Think of a family managing their budget. A family’s income is the government’s revenue and their expenses are the government’s spending. If the family decides to stimulate their local economy, they will spend more. By putting in money into the economy they create more demand and boost employment, this is expansionary fiscal policy. If the family wants to save money because they are worried about overspending or want to save up, they cut back on expenses, which is contractionary fiscal policy.
Expansionary fiscal policy is like the family deciding to spend money to stimulate the economy. While contractionary fiscal policy is as if the family was tightening their budget to save up or invest.
How do I remember it?
Remember that fiscal policy is the government’s way to meet economic goals. Then think of the word expanding for expansionary fiscal policy. They are expanding their costs and trying to stimulate the economy. Then think of the word contract for contractionary fiscal policy, they are trying to spend less and save more money
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