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How does fiscal policy work? When policymakers seek to influence the economy, they have two main tools at their disposal—monetary policy and fiscal policy. Central banks indirectly target activity by influencing the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing.
Fiscal policy is especially difficult to use for stabilization because of the “inside lag”—the gap between the time when the need for fiscal policy arises and when the president and Congress implement it. If economists forecast well, then the lag would not matter because they could tell Congress the appropriate fiscal policy in advance. But economists do not forecast well. Absent accurate forecasts, attempts to use discretionary fiscal policy to counteract business cycle fluctuations are as likely to do harm as good. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policy, is far more agile than fiscal.
Definition of fiscal policy: Decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full...
For more on fiscal policy, read What is Fiscal.
Definition of fiscal policy: Government's revenue (taxation) and spending policy designed to (1) counter economic cycles in order to achieve lower unemployment, (2) achieve low or no inflation, and (3) achieve sustained but contr...
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6em;"> v t e In economics and political science, fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.  According to Keynesian economics, when the government changes the levels of taxation and governments spending, it influences aggregate demand and the level of economic activity. Fiscal policy can be used to stabilize the economy over the course of the business cycle.  The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables, amongst others, in an economy: Aggregate demand and the level of economic activity; Savings and Investment in the economy The distribution of income Fiscal policy can be distinguished from monetary policy, in that fiscal.