Fiscal policy- The taxation and spending decisions of a government with the intention of manipulating aggregate demand.
One of the three main economic policies the government use to influence economic activity and achieve their macroeconomic policy objectives (keep inflation low and steady, reduce unemployment, balance payments and for our economy to have sustainable growth)
Fiscal policy covers the taxation and spending decisions of a government. The government can change tax rates, the types of taxes it imposes and what is taxed, along with the compostion, amount and timing of government spending.
The KEY AIM of Fiscal policy is to influence aggregate demand. The government can raise AD by increasing its own spending and/or reducing taxes, this is because government spending is a component of Aggregate demand AD= C+I+X-M)
By spending money on computers in schools for example will directly increase AD, also a cut in income tax will increase people's disposable income. This will cause consumption to rise, therefore also increasing aggregate demand.
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