What is fiscal policy?


Fiscal policy is an instrument of macroeconomic policy that affects the size of economic activity through changes in government spending and/or taxes.

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Fiscal policy (fiscal policy) is a tool of macroeconomic policy that affects the size of economic activity through changes in government spending and/or taxes.

In the 1930s, Keynes argued that government needed to increase spending and be willing to accept budget deficits in order to move the economy from rampant unemployment to near full employment.

Theoretically, a policy of increasing spending or cutting taxes increases aggregate demand through the death label effect, thereby creating more jobs to meet the increased aggregate demand and increasing national income from Y* to Y1 (as shown in the image below). If economic activity levels are too high, or the economy is overheating, the government can cut spending or raise taxes to cut aggregate demand.

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The primary goal of fiscal policy is to reduce the size of output volatility over the business cycle. This goal leads to the view that the government needs to regulate the functioning of the economy.

Many economists argue that fiscal policy is not a panacea that can cure every disease of the economy. They argue that it is appropriate only for the recession that existed when Keynes wrote his General Theory of Employment, Interest Rates, and Money in 1936, but not for an inflationary economy. So in the late 1970s, when inflation and recession appeared, fiscal policy was not as popular as before. People began to believe in the effectiveness of monetary policy in achieving macroeconomic goals.

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Currently, economists argue a lot about which policies are more effective in adjusting the economy.

(References: Nguyen Van Ngoc, Economic Dictionary, National Economics University)

Compare fiscal and monetary policy

Define

Fiscal policy is the use of government spending and revenue to influence the economy.

Monetary policy is the process by which a country’s monetary authority controls the money supply, usually targeting a rate of interest to achieve a set of goals towards the growth and stability of the country. economy.

Rule

Fiscal policy manipulates the level of aggregate demand in the economy to achieve economic goals of price stability, full employment, and economic growth.

Monetary policy manipulates the money supply to affect outcomes such as economic growth, inflation, exchange rates with other currencies, and unemployment rates.

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Policy maker

For fiscal policy, the government creates the policy (e.g. US Congress, Bank Clerk)

For monetary policy, the Central Bank (e.g. the US Federal Reserve or the European Central Bank)

Policy implementation tool

For fiscal policy it is taxes and the amount of government spending

For monetary policy it is interest rates; Reserve requirement; exchange rate policy; quantitative easing; open market operations…

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