Fiscal Policy

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Definition: Fiscal Policy

Fiscal policy and monetary policy are two tools by which the government tries to influence the macroeconomic conditions of the country.

By using fiscal policy, the government modifies its spending as well as the tax rates to boom or control the economy.

An expansionary fiscal policy, used during recession, increases the public spending while reducing the tax burden on people. It leads to more supply of money hence boosting the economy and creating more employment. This however, will also be followed by rise in inflation.

A contractionary fiscal policy on the other hand reduces the public spending while increasing the tax revenues, thus decreasing the money supply in the economy.

 

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