Dr M Manjunath Shettigar

Fiscal Policy is deliberate changes in

government (public) expenditure and taxes
so as to achieve desired macroeconomic
objectives stability, full employment and
growth.

FP is mainly used as a countercyclical

policy tool.
It can also be used to promote econ
development/growth.

WHEN the government makes use of its

revenue and expenditure programmes (to
achieve the above mentioned goals) and
affects the aggregate level of demand for
goods and services in the economy, then this
action is essentially known as fiscal policy.
Related to fiscal policy are deficits and
surpluses. When the governments
expenditure exceeds its revenue, then there is
a fiscal deficit and the opposite of this is
known is fiscal surplus.

When policymakers change the money

supply, the effect on aggregate demand is
indirectthrough the spending decisions
of firms or households.
When the government alters its own
purchases of goods or services, it shifts
the aggregate-demand curve directly.

 Two

types of fiscal policy

stances/ orientations

Expansionary

fiscal policy,
Contractionary fiscal policy

The instruments of fiscal policy

include
1. Taxes
2. Public Spending and
3. Borrowing

Key variables manipulated & the

operating procedure
Fiscal policy
stance

Time
when
used

Govt.
spending

Tax rates

Govt.
Borrowing

Expansionary
policy stance

Recession

Increased

Decreased

Increased

Contractionary
policy stance

Inflation

Decreased

Increased
(selectively)

decreased

Neutral policy
stance

Stable
conditions

Held stable

Held stable

Held stable