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Fiscal policy - introduction

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_macroeconomics\images\budget.jpgWhat is Fiscal Policy?


Fiscal policy is the use of government expenditure and taxation to manage the economy.

Fiscal Policy can:

  • boost the level of economic activity if there is a shortage of demand which is causing a deflationary gap. In this case, it is called reflationary policy.
  • reduce the level of economic activity if too much demand in the economy is causing an inflationary gap . In this case, a deflationary policy is appropriate.
  • be a supply-side policy ,used to improve incentives, e.g. through income tax cuts, or to improve the quality of resources, such as increased government expenditure on health and education and subsidies to key areas