Fiscal Policy
Government spending and taxation decisions that expand or contract the economy, independent of the central bank's monetary levers.
Fiscal policy is how a government uses its budget — spending levels, tax rates, and deficits — to influence economic activity. Expansionary fiscal policy (more spending or tax cuts) stimulates demand; contractionary policy (cuts or tax hikes) cools it.
Fiscal and monetary policy can work in tandem or at cross-purposes. Heavy deficit spending while a central bank is tightening creates conflicting signals. Large fiscal stimulus can complicate a central bank's inflation-fighting mandate, keeping rates higher for longer — a dynamic that weighs on long-duration bonds.
Related Terms
Budget Deficit
When government spending exceeds tax revenue in a given year, the gap must be financed by issuing new debt — adding to the national debt.
BeginnerCurrent Account
Broadest measure of a country's transactions with the world — trade in goods, services, income, and transfers — and a key driver of long-run currency valuation.
IntermediateGross Domestic Product (GDP)
The total monetary value of all goods and services produced within a country in a given period — the headline measure of economic size and growth.
BeginnerInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerNational Debt
The total accumulated stock of government borrowing — the sum of all past budget deficits minus surpluses, financed through outstanding bonds.
IntermediateTrade Balance
The difference between a country's exports and imports — a surplus means more exports; a deficit means more imports, affecting GDP and currency.
Intermediate