Fiscal Policy
Plain definition
Government decisions about taxation and spending used to influence aggregate demand, output, and employment.
In economics
Expansionary fiscal policy (higher spending or lower taxes) boosts aggregate demand to fight recessions; contractionary fiscal policy (spending cuts or tax hikes) cools inflation. Unlike monetary policy, fiscal policy is set by elected officials, can target specific groups, but faces political delays and can raise deficits and debt.
Example
During a recession, Congress passes a $500 billion infrastructure bill and cuts income taxes. Construction hiring rises, households have more after-tax income to spend, and the combined demand boost helps close the recessionary gap, though the budget deficit widens.
Fiscal policy is confused with monetary policy. Fiscal policy is the government's use of taxes and spending; monetary policy is the central bank's control of interest rates and money. They are run by different institutions and can pull in opposite directions.