Government's Economic Toolkit

Fiscal policy involves the use of government spending and taxation to influence the economy. It's how governments try to smooth out the ups and downs of the business cycle.

Expansionary Fiscal Policy

Increasing government spending or cutting taxes to stimulate economic growth, often used during recessions.

Contractionary Fiscal Policy

Decreasing spending or raising taxes to slow down an overheating economy and control inflation.

Automatic Stabilizers

Built-in policies like unemployment insurance and progressive taxation automatically help stabilize the economy without additional government action.

Challenges

Fiscal policy can be affected by political processes, time lags, and public debt concerns.