Introduction to Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence the economy.

Expansionary policy shifts the aggregate demand curve to the right, while contractionary policy shifts it to the left.

When the economy is producing less than potential output, expansionary fiscal policy can be used to employ idle resources and boost output.

Tax cuts have a smaller affect on aggregate demand than increased government spending.

Fiscal policy impacts GDP through the fiscal multiplier.

Fiscal policy can have a multiplier effect on the economy.