Fiscal policy refers to the guiding principles of the financial work which are constituted by the state based on political, economic and social development tasks under a certain period. Its purpose is to regulate aggregate demand through government’s spending and tax policies. On the one hand, an increase in government spending will stimulate aggregate demand and increase the national income. Correspondingly, a decrease will depress aggregate demand and reduce national income. On the other hand, a tax is a kind of contraction strength to national income. Therefore, the aggregate demand and the national income will be restrained though increasing government revenue. And they will be increased due to reducing in government revenue as well. The fiscal policy with a distinct class character is formulated by the state, represents the will and interests of the ruling class, and is subject to a certain level of development of social productive forces and economic relations. The state fiscal policy is an integral part of overall economic policy, and is closely linked with the other economic policies. In fact, the development and implementation of fiscal policy must be cooperated with the financial policy, industrial policy and income distribution policy and other economic policy.
The important role played by the fiscal policy in a developing economy can be explained through :
- Fiscal policy during inflation,
- Fiscal policy during depression,
- Fiscal policy and unemployment,
- Fiscal policy and income inequalities and
- Fiscal policy and economic growth.
Inflation is a period in which the purchasing power with, the people in the economy is high.… Read the rest