Fiscal Policy Quiz

Fiscal Policy and Its Use of Government Revenue Collection and Expenditure to Influence a Country's Economy

• Fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy.
• Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorised that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity.
• Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives.
• Changes in the level and composition of taxation and government spending can affect macroeconomic variables, including inflation, employment, and GDP growth.
• Fiscal policy can be distinguished from monetary policy, which deals with the money supply, interest rates, and is often administered by a country's central bank.
• The recession of the 2000s decade shows that monetary policy also has certain limitations, and government spending is responsible for creating demand in the economy and can provide a kick-start to get the economy out of the recession.
• Depending on the state of the economy, fiscal policy may reach for different objectives: its focus can be to restrict economic growth by mediating inflation or, in turn, increase economic growth by decreasing taxes, encouraging spending on different projects that act as stimuli to economic growth and enabling borrowing and spending.
• Governments use fiscal policy to influence the level of aggregate demand in the economy, so that certain economic goals can be achieved.
• Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.
• Some economists oppose the discretionary use of fiscal stimulus because of the inside lag (the time lag involved in implementing it), which is almost inevitably long because of the substantial legislative effort involved.
• Some economists are concerned about potential inflationary effects driven by increased demand engendered by a fiscal stimulus.
• Fiscal policy is a complex issue, and different models are being designed to manage it.