Fiscal Policy as defined by Investopedia is government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal Policy is generally controlled by the Legislative and Executive branches of government. There are two primary components of Fiscal Policy, government expenditures and taxes. Government expenditures are anything the government spends money on this includes all government consumption and investment but excludes transfer payments made by a state. By imposing taxes the government receives revenue from the population. Taxes come in many varieties and serve different specific purposes, but the key concept is that taxation is a transfer of assets from the people to the government. . There are two main types of fiscal policy, expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy is designed to stimulate the economy during or in anticipation of a business cycle contraction. This is achieved by increasing aggregate expenditure and aggregate demand through an increase in government spending or a decrease in taxes. Expansionary policy generally leads to a larger budget deficit or a smaller budget surplus. Contractionary fiscal policy is designed to restrain the economy during or in anticipation of an inflation-inducing business cycle expansion. This is accomplished by decreasing aggregate demand and aggregate expenditure through a decrease in government spending or an increase in taxation. Thus contractionary fiscal policy will lead to a smaller budget deficit or a larger budget surplus. When discussing fiscal policy there are typically three tools available; government purchases, taxes, and transfer payments.
Government purchases are expenditures by the government sector, on purchases of final goods and services. Things that fall in this category are teacher’s salaries, office supplies,...
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Horton, Mark, and Asmaa El-Ganainy. "Fiscal Policy: Taking and Giving Away - Back to Basics: Finance & Development." IMF -- International Monetary Fund Home Page. N.p., 7 June 2001. Web. 6 Dec. 2012. .
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