final policy

• Fiscal policy


  A macroeconomic policy that involves changes to government spending and taxation in order to influence aggregate demand in the economy
• Fiscal policy

  • It is a demand-side macro policy
  • It can be expansionary (changes to G and T to boost aggregate demand)
  • It can be contractionary (changes to G and T to reduce aggregate demand)
• Expansionary fiscal policy


  Aims to boost aggregate demand
• Contractionary fiscal policy


  Aims to reduce aggregate demand
• Reasons for expansionary fiscal policy

  • To increase economic growth
  • To reduce cyclical unemployment
  • To increase demand-pull inflation (in theory, not reality)
  • To redistribute income and reduce inequality
• Reasons for contractionary fiscal policy

  • To cool down an overheating economy
  • To reduce the budget deficit and government debt
  • To redistribute income and reduce inequality
  • To reduce the current account deficit
• Expansionary fiscal policy


  1. Tax policies (cut income tax, cut corporation tax, reduce regressive taxes)

  2. Increase government spending (on healthcare, education, infrastructure, public sector wages)
• Expansionary fiscal policy


  Can also boost long-run aggregate supply as a side effect (e.g. incentivize labour force participation, boost investment and productivity)
• The primary focus of expansionary fiscal policy is to boost aggregate demand, boosting long-run aggregate supply is a side effect