August 29, 2014

Fiscal Policy Explained

Fiscal Policy usually works in tandem with Monetary Policy. Fiscal Policy is something which is usually put into practice to alter taxes as well as government spending, with the ultimate goal to boost an economy or prevent it from overheating due to inflation. A fiscal policy which looks to grow the economy will lower tax rates and increase spending, looking to encourage consumers to buy more goods and services. Contrastingly, a Fiscal policy which looks to bring down inflation will raise taxes and reduce spending in order to encourage consumers to stop buying too many services and goods.

The fiscal policy is usually joined by the Monetary Policy. A central bank usually alters the interest rate and money supply within an economy in order to correlate to the goals of the fiscal policy. For example, it will lower interest rates and boost money supply in order to help the economy get out of a recession. But in order to prevent an economy from over-heating, it will simply reduce the money supply and increased interest rates which will encourage consumers to spend less and save more.