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Fiscal policy are the policies implemented by the government to influence the macroeconomic conditions in the economy. These policies can be used to curb aggregate demand or supply and even increase it. Fiscal policies are generally implemented along with monetary policies, which are implemented by the central bank, to control the money supply in the economy. By influencing money supply government and thus influence economic growth and employment levels.
The tools under fiscal policy are-
1. The most important tool of fiscal policy under the control of the government is the taxation. The government adjusts the tax rates according to the economic conditions and needs of the country. Other than providing funds for the government, taxes can also help in controlling fluctuations in the economy. The government increases the taxes of the commodities that are not productive and the ones that brings harm to the citizens of the country.
2. Another tool for the government is subsidies. Subsidies are given by the government to promote certain things that are needed for growth and development. They are also given to people who cannot afford certain basic necessities. For example: The government gives subsidies for fertilizers and pesticides so that farmers can afford them. Also, education is highly subsidised in government schools as it is seen as an important factor for economic growth and development.
3. Public expenditure is another fiscal policy adopted by the government. The government undertakes certain projects for the development of the community. Along with the development of infrastructure, these projects also employ many people, increasing the income of money. The government halts such activities when the money flow is more in the economy, in such cases these projects will not help but keep increasing the flow of money and worsen the economic conditions so these unnecessary expenditures is stopped.
The types of fiscal policy
1. Expansionary- The expansionary fiscal policy triggers economic growth. The government ties to increase money supply in the economy through expansionary policy. The government would increase public expenditure or continue the halt projects to increase employment and giving jobs to many. It would also increase the subsidies or provide subsidies in necessary commodities and on the other hand, it would cut down the taxes. This increases the purchasing power of the people, thus increasing overall aggregate demand and aggregate supply. All these elements blend together and lead to economic growth. The expansionary policy also helps during deflation.
2. Contractionary- It is the exact opposite of expansionary policy. The objective of contractionary policy is to reduce economic growth, these policies are generally undertaken during inflation when the prices are extremely high and money supply is too much in the economy. The government curtails unwanted expenditure, reduces subsidies and increases taxes to reduce the money supply and tries to bring the economy back to normal as long-term effects of inflation can also be harmful. The main objective is to reduce the excess money from the economy.
These policies along with the monetary policies try to stabilise the economy in case of any fluctuations and hence the tools used by the government and the central bank to influence the money flow has to be used very carefully.