what is fiscal policy 
fiscal policy refers to the use of government spending and tax policies to influence economic conditions especially macroeconomic conditions these include aggregate demand for goods and services employment inflation and economic growth during a recession the government may lower tax rates or increase spending to encourage demand and spur economic activity conversely to combat inflation it may raise rates or cut spending to cool down the economy fiscal policy is often contrasted with monetary policy which is enacted by central bankers and not elected government officials understanding fiscal policyu s fiscal policy is largely based on the ideas of british economist john maynard keynes 1883 1946 he argued that economic recessions are due to a deficiency in the consumer spending and business investment components of aggregate demand keynes believed that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies to make up for the shortfalls of the private sector 1his theories were developed in response to the great depression which defied classical economics assumptions that economic swings were self correcting keynes ideas were highly influential and led to the new deal in the u s which involved massive spending on public works projects and social welfare programs in keynesian economics aggregate demand or spending is what drives the performance and growth of the economy aggregate demand is made up of consumer spending business investment spending net government spending and net exports according to keynesian economists the private sector components of aggregate demand are too variable and too dependent on psychological and emotional factors to maintain sustained growth in the economy 1pessimism fear and uncertainty among consumers and businesses can lead to economic recessions and depressions what s more excessive public sector exuberance during good times can lead to an overheated economy and inflation however keynesians believe that government taxation and spending can be managed rationally and used to counteract the excesses and deficiencies of private sector consumption and investment spending in order to stabilize the economy 1