When demand-pull inflation occurs, contractionary fiscal policy may help control it.
What is Contractionary fiscal policy?
- In contractionary fiscal policy, the government taxes more than it spends either by increasing tax rates, decreasing spending, or both. This type of fiscal policy is best used during times of economic prosperity.
What is fiscal policy?
- Fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy.
- The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable.
- Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorized that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity.
- Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives.
- Fiscal policy is used to stabilize the economy over the course of the business cycle.
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