Fiscal Policy

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  • Political decisions by government about taxes and spending to influence conditions in the larger economy such as employment and housing.

    There are essentially two sides to fiscal policy: taxation and public expenditure. Policies may change tax rates or the rules about liability to tax or change spending on real goods and services.

    Public expenditure may be categorized into two components: (1) expenditure on goods or services and (2) transfer payments. Because aggregate demand is an increasing function of government spending and a decreasing function of taxation, these instruments can affect economic activity. In times of recession, when aggregate demand is too low in relation to the productive capacity of an economy, a combination of tax cuts and public expenditure may be used to stimulate demand. In times ...

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