Fiscal policy is called as is the sister strategy to monetary policy. It is the
way by which governments stabilize the economy. Here the government uses two tools they are tax rate and governmnet spending.

Tools for fiscal policy: There are two tools for monetary policy Government spending and Taxation. Taxation includes income, capital gains from investments, property, and sales. Taxes provide the income that funds the government. Government spending includes subsidies, transfer payments including welfare programs, public works projects, and government salaries.

How these tools are used or types of Fiscal policy:

There are two types of fiscal policy. The most widely-used is expansionary. It stimulates economic growth. Here government will implement any of the following:

  • Government will spend more.
  • Government will cut the tax rate.
  • or both together.

Contractionary fiscal policy is rarely used. Its goal is to slow economic growth. This is used to eliminate inflation. Taxes are increased, and spending is cut.

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