economics definitions

Fiscal policy concerns the decisions of government about its spending, taxation and borrowing. It has a main impact on AD. Expansionary fiscal policy, where government spending is increased relative to taxation and hence government borrowing increases or a budget surplus is reduced, leads to an increase in AD. This in turn is likely to lead to a rise in GDP and falling unemployment, but rising inflation and deterioration in the current account on the balance of payments. Deflationary fiscal policy, where the budget deficit falls or surplus rises, is likely to lead to the opposite, with falling economic growth but also falling inflationary pressures.