Fiscal Policy
Candlefocus EditorFiscal policy is based on Keynesian economic theory, championed by British economist John Maynard Keynes. His main argument was that governments could regulate economic output, stabilize the business cycle, and stimulate demand in the economy by implementing appropriate fiscal policy measures. Keynes believed that governments had the capacity to intervene in the economy in order to prevent economic downturns as well as steer the economy to higher levels of employment and output.
The most common types of fiscal policy measures include altering the level of taxation or government spending. An expansionary fiscal policy utilizes government spending or a reduction in taxes in order to stimulate aggregate demand, thus creating an increase in economic growth. On the other hand, a contractionary fiscal policy seeks to reduce inflationary pressures by raising taxes or reducing the size of government spending.
Fiscal policy often works in conjunction with monetary policy (which focuses on regulating the money supply for a given economy). Both of these policies are used to shape the macroeconomic environment, regulate economic growth, and address macroeconomic issues such as unemployment, inflation, and the distribution of wealth.
Fiscal policy plays a critical role in the performance of an economy. When used correctly, it can help create the conditions for economic success and sustainability. However, when it is used incorrectly, it can lead to higher taxes, increased unemployment, and an increased financial burden on citizens. Therefore, it is important for governments to exercise caution and restrain when implementing fiscal policy measures.