Fiscal Policy Refers To Flashcards, test questions and answers

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What is Fiscal Policy Refers To?

Fiscal policy refers to the economic policies of a government that are related to taxation, spending and borrowing. It is designed to influence macroeconomic variables such as aggregate demand, employment, inflation and investment. Fiscal policy has an important role in managing economic activity by influencing levels of consumption and investment through changes in taxes or government spending.The most commonly used fiscal tools for governments are changing income tax rates, corporate tax rates, capital gains taxes, sales taxes and tariffs. Governments also use instruments like direct transfers from taxpayers (such as welfare payments) or indirect measures that affect prices (like subsidies). In some cases they may increase public debt through borrowing or reduce it with surpluses. Through these measures policymakers can use fiscal policy to stimulate an economy during periods of recession or slow growth by increasing aggregate demand through lower taxes and higher government spending on infrastructure projects or other programs which benefit businesses and citizens alike. Likewise fiscal contractionary policies can be implemented during times of overheating in order to reduce aggregate demand by raising taxes thus curbing consumer expenditure while simultaneously reducing government spending on certain programs. In addition fiscal policy can be used to redistribute income among different parts of society as well as help correct market failures due to externalities like environmental pollution or inadequate funding for key services like health care or education. Finally it helps stabilize the macroeconomy since changes in the budget balance often have large implications for interest rates which affect both investment decisions and consumer behaviors across the entire economy.