Fiscal Policy

An increase in government spending or a decrease in taxes to boost aggregate demand and close a deflationary gap.

Government spending can directly increase aggregate demand when private sector demand is weak.

Expansionary policy is used during recessions, and contractionary policy is used during inflationary periods to stabilize the economy.

A decrease in government spending or an increase in taxes to reduce aggregate demand and close an inflationary gap.

It can target specific sectors and is more effective during severe recessions.

When government borrowing increases interest rates, reducing private sector investment.

Because changes in taxation and spending require political approval and time to take effect in the economy.

Political pressure, time lags, sustainable debt limits, and crowding out (HL only).

The use of government revenue collection (taxation) and expenditure to influence the economy.

By reducing aggregate demand through higher taxes or lower government spending in times of inflation.

Current expenditures, capital expenditures, and transfer payments.

By investing in infrastructure, education, and healthcare to improve productive capacity.

Through progressive taxation and transfer payments, redistributing income to reduce inequality.

Direct and indirect taxation, sale of goods and services from state-owned enterprises, and sale of government assets.

It often has longer time lags and can increase public debt if overused.

To manage demand in the economy in order to achieve macroeconomic objectives such as growth, low unemployment, and stable inflation.

Mechanisms like progressive taxes and unemployment benefits that automatically counteract economic fluctuations.

By increasing spending or providing subsidies to industries like education, health, or renewable energy.

By increasing aggregate demand through higher government spending or tax cuts during recessions.