Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
▪ Aggregate demand and the level of economic activity; ▪ The pattern of resource allocation; ▪ The distribution of income.
Fiscal policy refers to the use of the government budget to influence the first of these: economic activity.
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|1 Stances of fiscal policy |
|1.1 Methods of funding |
|1.2 Borrowing |
|1.3 Consuming prior surpluses |
|2 Economic effects of fiscal policy |
|3 Fiscal Straitjacket |
|4 See also |
|5 References |
|6 Bibliography |
|7 External links |
Stances of fiscal policy
The three possible stances of fiscal policy are neutral, expansionary and concretionary. The simplest definitions of these stances are as follows:
▪ A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue.