ong>Explanation:

Fiscal policy is the use of government REVENUE collection (taxation) and expenditure (spending) to influence the economy.

LEARNING OBJECTIVES

Identify the central elements of fiscal policy

KEY TAKEAWAYS

Key Points

The two main instruments of fiscal policy are government taxation and expenditure.

There are three main stances in fiscal policy: neutral, expansionary, and contractionary.

Even with no changes in spending or tax laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of some types of government spending, which alters the deficit situation; these are not considered fiscal policy changes.

Key Terms

taxation: The act of imposing taxes and the fact of being taxed

expenditure: Act of expending or paying out.

fiscal policy: Government policy that attempts to influence the DIRECTION of the economy through changes in government spending or taxes.

In economics and political science, fiscal policy is the use of government budget or revenue collection (taxation) and expenditure (spending) to influence economic. The two main instruments of fiscal policy are government taxation and expenditure. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: (1) aggregate demand and the level of economic activity; (2) the pattern of RESOURCE ALLOCATION; and (3) the distribution of income.

The three main stances of fiscal policy are:

Neutral fiscal policy, usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

Expansionary fiscal policy, which involves government spending exceeding tax revenue, and is usually undertaken during recessions.

Contractionary fiscal policy, which OCCURS when government spending is lower than tax revenue, and is usually undertaken to pay down government debt.