Analytical aspect

of
Fiscal Policy
Public Finance & Policy
Presented By:
Mayank
MA Economics
Fiscsl Policy
• Fiscal policy is a tool used by
governments to influence the
Expansionary Policy
economy.

• It involves the government's use

of taxation and spending to Fiscal Policy
achieve economic goals such as
economic growth, full
employment, and price stability.
Contractionary
• There are two main types of fiscal Policy
policy: expansionary and
contractionary.
 Expansionary Fiscal
Policy
• Increases government spending
• Cuts taxes
• Puts more money into the hands of
consumers and businesses
• Can lead to increased spending and
investment
• Can help to boost economic growth
Contractionary Fiscal
Policy
• Reduces government spending
• Increases taxes
• Takes money out of the economy
• Can help to slow down economic growth
• Can be used to control inflation or to reduce the
government's budget deficit
The Analytical Aspects of
Fiscal Policy
• The Impact of fiscal policy on aggregate
demand

• The impact of fiscal policy on the

government's budget deficit

• The impact of fiscal policy on the distribution

of income

• The political economy of fiscal policy

The Impact of Fiscal Policy on Aggregate Demand
• Aggregate demand is the total demand for goods and services in the economy.

• Expansionary fiscal policy can increase aggregate demand by putting more money into the
hands of consumers and businesses.

• This can lead to increased spending and investment, which can boost economic growth.

The Impact of Fiscal Policy on Government's Budget

Deficit
• When the government increases spending or cuts taxes, it typically leads to a larger
budget deficit.

• This is because the government is spending more money than it is taking in.

• A larger budget deficit can lead to higher interest rates and a weaker currency.
The Impact of Fiscal Policy on Distribution of Income
• Fiscal policy can also have an impact on the distribution of income.

• For example, if the government cuts taxes for the wealthy, this will tend to increase income
inequality.

• On the other hand, if the government increases spending on social programs, this can help to reduce
income inequality.

The Political Economy of Fiscal Policy

• Fiscal policy is also subject to political considerations.

• For example, governments may be reluctant to raise taxes, even if this is necessary to
reduce the budget deficit.

• This is because raising taxes can be unpopular with voters.

Tools for Fiscal Policy
By employing various economic tools and models, policymakers can assess the
effects of fiscal policy on key macroeconomic variables such as

• Macroeconomic Modeling:
These models help economists and policymakers understand the relationships between fiscal variables and
macroeconomic outcomes.

• Fiscal Multipliers:
Fiscal multipliers are fundamental analytical tools in assessing the impact of fiscal policy on economic activity. They
quantify how changes in government spending or taxation affect overall output (GDP).

• Budgetary Analysis:
Analyzing the budgetary aspects of fiscal policy involves evaluating government revenues and expenditures.
Conclusion
Through macroeconomic modeling, fiscal multipliers, distributional
analysis, sustainability assessment, and budgetary analysis, policymakers
can evaluate the impact of fiscal policy on aggregate demand,
employment, inflation, economic growth, and income distribution.

By employing rigorous analytical tools, policymakers can make informed

decisions to promote economic stability, equitable outcomes, and long-
term fiscal sustainability.

Thank You