The way government manages money. Politicians (government) control fiscal policy
Two types of fiscal policy:
- expansionary fiscal policy - to [increase economic activity](Level of economic activity)
- contractionary fiscal policy - to decrease economic activity. If economic growth is 3% and the goal is 2% then government wants economy to contract
Two fiscal options for decreasing or increasing economic activity:
- spending
- taxing - higher taxes lead to decreased activity (more taxes → less spending). Lower taxes on other hand lead to increased activity