Topics: Keynesian economics, Public finance, Macroeconomics Pages: 3 (687 words) Published: February 25, 2014

Fiscal Policy, a very vital part of economics, is referred to as the government spending as well as revenue collection of a country. • Fiscal Policy has two main instruments that are;

• Government spending

• Taxation.

• There are certain changes in the composition and level of government spending and taxation that impact the following variables in the economy of a country:

• Aggregate demand and the level of economic activity.

• Resource allocation pattern.

• Distribution of income.

• The overall effect of the budget outcome on an economic activity is termed as Fiscal policy of a country. There are three particular stances regarding the fiscal policy of a country that are; neutral, expansionary and contractionary:

• A neutral stance regards a balanced budget where “Government spending = Tax revenue” (G = T). The government spending is funded by tax revenue and the overall effect of the budget outcome is neutral on the economic activity.

• Expansionary stance of the fiscal policy denotes a net increase in Government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. The effect usually leads to a larger budget deficit or a smaller budget surplus than the Government previously had, or a deficit if the Government previously had a balanced budget. Expansionary fiscal policy is mostly associated with budget deficit for an economy.

• Contractionary fiscal policy (G < T) involves the reduction of the Government spending through higher taxation revenue or reduced Government spending or the combination of the two in such a way. This leads to a lower budget deficit or a larger surplus than the Government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

Funding Methods

• The government spends money on a wide...
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