Series 50: Fiscal Policy

Fiscal Policy

In addition to monetary policy, the government can also use fiscal policy to influence the direction of the economy. Fiscal policy refers to either the president or Congress approving measures to alter either taxes or government spending.

During a recession, the federal government may try to stimulate the economy through fiscal policy designed to increase consumer spending. This expansionary fiscal policy may include either lowering taxes to give consumers more money or increasing government spending to provide more jobs and services for consumers so that they will have more money in their pockets to spend. Some examples of government spending are:

• • Increasing unemployment insurance and welfare benefits
• • Building more roads
• • Increasing military spending

An expansionary fiscal policy may depend on automatic stabilizers. Automatic stabilizers are programs that automatically fluctuate depending on the economy. For example, in a recession, the number of people who need unemployment insurance, food stamps, and welfare benefits will increase as unemployment increases. Conversely, when an economy does well, the need for these programs automatically decreases.

During a peri