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Structure of Public Finance - Fiscal Policy

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Fiscal Policy :
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It deals with the public expenditure, public revenue and public debt. In short, it is the financial policy implemented by the Government.
For better Understanding:

  • Fiscal policy refers to the use of government spending and tax policies to influence economic conditions.
  • Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output.
  • During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase aggregate demand and fuel economic growth.
  • In the face of mounting inflation and other expansionary symptoms, a government may pursue a contractionary fiscal policy.

How Does Fiscal Policy Affect People?

Fiscal policy is enacted by a government. This is opposed to monetary policy, which is enacted through central banks or another monetary authority.The effects of any fiscal policy are not often the same for everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class. Similarly, when a government decides to adjust its spending, its policy may affect only a specific group of people. A decision to build a new bridge, for example, will give work and more income to hundreds of construction workers. A decision to spend money on building a new space shuttle, on the other hand, benefits only a small, specialized pool of experts and firms, which would not do much to increase aggregate employment levels.

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