Topic 12 · macro
Fiscal Policy
The government affects the economy through taxes and public spending — that is fiscal policy.
Tools
Taxes and public spending. Unlike monetary policy (the central bank), fiscal policy is run by the government/budget.
How it works
Expansionary: more spending and/or lower taxes → demand rises (in a downturn). Contractionary: less spending and/or higher taxes → demand is curbed (in overheating/inflation).
Budget and debt
Spending > revenue → a deficit (covered by borrowing), revenue > spending → a surplus. Accumulated deficits → public debt.
🎯 Now possible
- name the tools of fiscal policy
- tell expansionary from contractionary
- explain the deficit and public debt
Cheat sheet
Fiscal policy is run by the government
Downturn → expansionary (spending↑, taxes↓)
Inflation/overheating → contractionary
Spending > revenue → deficit → debt
Practice on this topic
Where to read more: Мэнкью — гл. 35