Economics » Public Finance » Fiscal Policy and Its Instruments

Fiscal Policy and Its Instruments

Fiscal policy is the use of taxation and government expenditure to regulate economic activity. Fiscal policy can be employed to achieve macroeconomic objectives of full employment, economic growth, external balance, price stability, and equitable distribution of income and wealth.

For example, a period of economic recession or depression characterized by sluggish economic growth with rising unemployment would call for an increase in the level of government expenditure (especially to raise aggregate demand), as well as tax reliefs and concessions to local industries to stimulate domestic production. These measures are collectively referred to as expansionary fiscal policy.

On the other hand, to control inflation pressure would require contractionary fiscal measures such as curtailing the growth of government spending, and raising taxes to reduce disposable income and aggregate demand.

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