What are Fiscal Policies?

U.S. Capitol, where lawmakers make fiscal policy.

Fiscal policies include the government's power to levy taxes and spend revenue on the various public programs and services. Through its abilities to tax and spend, government is an active participant in a nation's economy.

Identification

The legislative and executive branches of government (in the U.S., Congress and the president, respectively) control fiscal policies.

Types

Fiscal policies include government taxation and spending measures. Governments often use fiscal measures, such as tax cuts and spending increases, in times of economic weakness.

Famous Ties

The 2009 economic stimulus package, passed in the early weeks of President Obama's administration, is an example of using fiscal policy to stimulate the economy.

Effects

Through fiscal policy, government tries to impact such economic outcomes as the unemployment rate and the Gross Domestic Product (GDP).

Considerations

Fiscal policy often has a multiplier effect, in which government spending increases economy-wide demand for goods and services, leading to higher employment and growth.

Warning

Fiscal policy, such as higher government spending, can spark inflation, leading to higher interest rates, which reduce investment by raising the cost of borrowing.

References

• Macroeconomics (6th edition), Robert J. Gordon, 1993

Resources

• Council for Economic Education - Introduction to Fiscal and Monetary Policy