Fiscal Policy - Business concept of the day

Fiscal Policy - Business concept of the day

Economy

GlobalLinker Staff

GlobalLinker Staff

2 Jul 2018, 10:29 — 2 min read

Definition: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. 


Example: The Government radically changed its Fiscal Policy this year by spending heavily on infrastructure and reducing tax rates.


Business Insight:
The Budget is the time when the Government outlines its Fiscal Policy for the coming financial year.

 

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Fiscal policy refers to the government's spending and taxation practices and impacts essentially every individual and business in the nation. Fiscal policy influences the liable taxes, the amount of money the average consumer can afford to spend and, consequently, your bottom line. Therefore, fiscal policy and its implications are vital for any small business to understand. 

 
Expansionary fiscal policies include measures such as reducing tax rates, increasing direct payments to consumers via tax refunds and increase in government spending in order to increase economic activity in the economy. These policies contribute to an increase in aggregate demand and hence increasing aggregate supply leading to increased production and hence increased economic output. 

Contractionary fiscal policies on the other hand are used to slow down an economy by measures such as increasing taxes and decreasing government spending. One of the major reasons to use this type of policy is to control inflation. This is also known as "cooling down" an economy as rapid economic growth induces higher inflation rates that could ultimately curtail economic activity in the long run. Contractionary policies reduce the aggregate demand and hence reduce the aggregate supply and in turn reduce production and economic output.  

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