Fiscal policy includes all policies that involve either government spending or taxation in order to affect the economy - typically trying to improve GDP. The government can either engage in expansionary fiscal policy characterized by increased government spending and/or tax reductions or contractionary fiscal policy characterized by decreased government spending and/or tax increases. This branch of economics focuses on the relationship between the government and the economy, and how the government’s decisions affect different members of the economy.
Both expansionary and contractionary policies have there benefits and costs within the macro economy. Expansionary policy will typically help increase the output of the economy, but increase government debt. On the other hand, contractionary fiscal policy will decrease government debt, but may come at the cost of the economy's output. The extent of the effect of fiscal policies is debated and is not always clear. The neoclassical perspective views fiscal policy as ineffectual in the long run whereas the keynsian view finds fiscal policy as often necessary to stimulate the economy and drive it out of a recession. Keynsian economics often uses the multiplier effect as a reason that effective fiscal policy can indeed provide long run effects on the economy.© BrainMass Inc. brainmass.com July 23, 2021, 6:28 pm ad1c9bdddf