Fiscal policy is the use of government’s money in order to influence The fiscal policy effects; aggregate demand and the level of economic activity, Savings and Investment in the economy and the distribution of income. There are three main types of fiscal policy; neutral, expansionary, and contractionary. Neutral fiscal policy is undertaken when an economy is in equilibrium i.e; government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. Expansionary fiscal policy is when government spending is exceeding tax revenue,and it’s usually undertaken during recessions. It is also known as reflationary fiscal policy. Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt.
