Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Fiscal Policy

What it is:

Fiscal policy refers to a government's spending and taxation policies intended to maintain economic stability, which is indicated by levels of unemployment, interest rates, prices and economic growth.

How it works (Example):

A government is capable of directly affecting economic activity in response to fluctuations in macroeconomic growth. Via taxation and public spending, a government can control price inflation, unemployment rates, and interest rate levels.

For instance, in order to curb price inflation, which is associated with high levels of consumer spending, a government may institute higher taxes resulting in lower levels of disposable income. Likewise, a government might engage in public spending in order to increase an economy's cash flow during times of recession.

Why it Matters:

As the administrative body responsible for public wellbeing, a government implements fiscal policy in an effort to defend the interests of businesses and consumers from economic forces which, if left unchecked, could have adverse consequences.