– Current Blog Posts: Fiscal Policy

When it comes to national AD policy, economists generally talk about monetary AND fiscal policy. This paired set is considered to be the two primary means by which policy makers can try to stabilize AD. One point to emphasize in the beginning is that while these two kinds of policy are often aimed at exactly the same short-term goal, they are very different. They are done by different parts of the government and the tools and procedures for implementation are very different. Sometimes fiscal policy seems to reinforce the central bank’s monetary policy; other times they seem to clash and may at least partially offset each other. It is generally believed that fiscal policy is less flexible than monetary policy and therefore it is not applied as frequently. Nevertheless, it continues to be used in countries around the world and it frequently has both positive and negative impacts that we all have to deal with.

As with monetary policies there are many issues and controversies that relate to the use of fiscal policies. Since these differences of opinion play out in the political arena daily, business planners need to pay attention to them because the results will come to affect them. Fiscal policies of the past and expected policies of the future can have pronounced impacts on interest rates, spending, profits, exchange rates, and many other aspects of the business environment. This note develops the basic terminology, concepts, and theories that relate to fiscal policy.