AP MacroeconomicsFiscal Policy
Fiscal Policy
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.
Formula / Example
ΔAD ≈ ΔG × [1 ÷ (1 − MPC)] for a change in government spending.
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