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