Fiscal policy refers to the use of government’s spending and taxation policies as tools to shape and influence economic conditions, particularly macroeconomic factors like aggregate demand for goods and services, employment levels, inflation rates, and overall economic growth.
Governments employ fiscal policy to achieve various economic objectives. For instance, during economic downturns, they may increase government spending and reduce taxes to stimulate demand and spur economic growth. Conversely, during periods of high inflation or economic overheating, they might reduce spending and raise taxes to cool down the economy. Fiscal policy plays a vital role in stabilizing and managing a country’s economic health, and it is an essential component of government economic management.