Fiscal Policy vs Supply-Side Economics
Fiscal Policy and Supply-Side Economics are related concepts in AP Economics that students often mix up. In short: fiscal policy is fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy. Meanwhile, supply-side economics is supply-side economics argues that lower taxes and less regulation boost growth by increasing the incentive to work, save, and invest. Here is how they compare side by side.
Fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy.
Expansionary fiscal policy (more spending or lower taxes) shifts aggregate demand right to fight a recession; contractionary fiscal policy does the reverse to cool inflation. It is set by the legislature and executive, not the central bank. Its impact is amplified by the spending and tax multipliers but weakened by crowding out and time lags.
Supply-side economics argues that lower taxes and less regulation boost growth by increasing the incentive to work, save, and invest.
It focuses on shifting long-run aggregate supply right rather than managing demand. The Laffer curve suggests tax cuts can sometimes raise revenue by expanding activity. Critics question the size of those effects and warn of larger deficits.
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