Fiscal Policy
FISCAL POLICY
Fiscal policy concerns the federal government's use of taxation and public spending to affect the general flow of the economy. If, for example, the government wanted to stimulate consumer spending it might cut taxes and spend more on government programs, which would have the effect of giving consumers more cash. If, however, the government wished to cool off an economy that was in danger of inflation, it might raise tax rates and cut government spending to dampen economic activity. During the 1950s and 1960s many economists, especially followers of the British economist John Maynard Keynes (1883–1946), believed that fiscal policy could be used to fine-tune the economy. Some believed, for example, than the government might achieve a certain level of unemployment or gross domestic output through fiscal policy. However, later economists came to discredit this notion. They believed that government attempts to fine-tune the economy through fiscal policy were more likely to create problems than solve them.
See also: Keynesian Economic Theory