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101 Concepts for the Level I Exam

Concept 32: Roles and Objectives of Fiscal Policy


Fiscal policy refers to the use of the government expenditures and tax revenues to influence the overall output (GDP), economic growth and employment.

  • Budget deficit is when government expenditures exceed tax revenues and is used to tackle recession.
  • Budget surplus is when tax revenues exceed government expenditures and is used to tackle high inflation in the expansion phase.
  • Budget deficit is decreased in the expansion phase and increased in the recession phase.
  • Policy measures can be either of the two:
    • Discretionary: Measures taken to tackle that particular situation.
    • Automatic: For example: When the economy slows and unemployment rises, government spending on social insurance and unemployment benefits will rise. If the economy is at full employment, taxes collected will be high and there will be a budget surplus.

Objective of fiscal policy

  • Influencing economic activity and aggregate demand.
  • Wealth and income distribution among segment of society.
  • Resource allocation among sectors in economy.