Fiscal Policy
                     FISCAL POLICY
What Is Fiscal Policy?
■ Fiscal policy refers to the use of government spending and tax 
policies to influence economic conditions, especially 
macroeconomic conditions, including aggregate demand for 
goods and services, employment, inflation, and economic growth.
Source: www.investopedia.com
Types of fiscal policy
There are two types of fiscal policy:
■ Expansionary fiscal policy
■ Contractionary fiscal policy
Source: www.business-standard.com
Expansionary fiscal 
pThiso polliciyc is ydesigned to boost the economy. It is mostly used in 
times of high unemployment and recession. 
It leads to the government lowering taxes and spending more, or one 
of the two. The aim is to stimulate the economy and ensure 
consumers' purchasing power does not weaken.
Source: www.business-standard.com
Contractionary fiscal 
pAs tohe tleirmc suyggests, this policy is designed to slow economic growth 
in case of high inflation. The contractionary fiscal policy raises taxes 
and cuts spending.
Source: www.business-standard.com
Tools of fiscal policy
There are two key tools of the fiscal policy:
■ Taxation
■ Government spending
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Taxation
Funds in the form of direct and indirect taxes, capital gains from 
investment, etc, help the government function. Taxes affect the 
consumer's income and changes in consumption lead to changes in 
real gross domestic product (GDP).
Source: www.business-standard.com
Government spending
It includes welfare programmes, government salaries, subsidies, 
infrastructure, etc. Government spending has the power to raise or 
lower real GDP, hence it is included as a fiscal policy tool.
Source: www.business-standard.com
Fiscal policy objectives
Some of the key objectives of fiscal policy are economic stability, price 
stability, full employment, optimum allocation of resources, 
accelerating the rate of economic development, encouraging 
investment, and capital formation and growth.
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Importance of fiscal 
p■ oFisclail pcoliycy is a crucial part of the economic framework. In India, 
it plays a key role in elevating the rate of capital formation, both 
in the public and private sectors.
■ The fiscal policy helps mobilise resources for financing projects. 
The central theme of fiscal policy includes development activities 
like expenditure on railways, infrastructure, etc. 
Source: www.business-standard.com
Difference between monetary 
policy and fiscal policy
■ Monetary policy is concerned with the management of interest 
rates and the total supply of money in circulation. It is generally 
carried out by the RBI.
■ Fiscal policy, on the other hand, estimates taxation and 
government spending. It should ideally be in line with the 
monetary policy, but since it is created by lawmakers, people's 
interest often takes precedence over growth.
Source: www.business-standard.com