Fiscal policy is the use of government spending and taxation to influence the economy. It is the sister strategy to monetary policy, which uses the central bank’s money supply to adjust interest rates in order to influence economic activity. Fiscal policy is used to influence aggregate demand, which is the total amount of goods and services produced and consumed in an economy. Governments use fiscal policy to influence the level of economic activity, the distribution of income and wealth, and the pattern of resource allocation.
History of Fiscal Policy
Fiscal policy has been used since the time of the ancient Greeks, when governments used taxes to fund public works projects. In the 18th century, the British government used fiscal policy to fund the war effort. In the 19th century, the United States used fiscal policy to fund the Civil War and the industrialization of the country. In the 20th century, fiscal policy was used to fund the New Deal and the Great Society programs. In the 21st century, fiscal policy has been used to stimulate the economy during the Great Recession.
Comparison of Fiscal Policy
|Fiscal Policy||Monetary Policy|
|Uses taxes and government spending||Uses the money supply and interest rates|
|Influences aggregate demand||Influences the cost of borrowing|
|Used to influence economic activity, income distribution, and resource allocation||Used to influence inflation and employment|
Fiscal policy is the use of government spending and taxation to influence the economy. It is used to influence aggregate demand, economic activity, income distribution, and resource allocation. It has been used since the time of the ancient Greeks and has been used to fund wars, the industrialization of the United States, and the Great Recession. For more information on fiscal policy, visit the websites of the International Monetary Fund, the World Bank, and the U.S. Treasury Department.
- Monetary Policy
- Aggregate Demand
- Government Spending
- Interest Rates
- Money Supply
- Economic Activity
- Income Distribution