Introduction
Economic stability and growth are key to the prosperity of nations. Governments can help achieve these goals by using various tools to influence economic conditions. The main objectives of fiscal policy include achieving economic stability, fostering economic growth, and redistributing wealth.
In this article, we will explore how fiscal policy works, how it may affect crypto markets, and some of its benefits and challenges.
How Does Fiscal Policy Work?
There are three types of fiscal policy: neutral, expansionary, and contractionary.
Neutral fiscal policy
Neutral fiscal policy involves keeping the government budget balanced, meaning the amount the government spends equals the amount it earns. It is typically used to keep the economy stable and avoid any additional interventions.
Imagine Country A as a household managed by Alice and Bob.
They carefully budget their monthly income and expenses to ensure they spend exactly what they earn.
If Alice earns $1,000 and Bob earns $1,000, they plan their monthly expenses to total $2,000. This mirrors how government spending and revenue can be balanced during times of neutral fiscal policy, ensuring economic stability.kept in balance, ensuring economic stability.
Contractionary fiscal policy
Contractionary fiscal policy involves reducing government spending and increasing taxes to slow economic growth and combat inflation. By taking money out of the economy, the government aims to reduce overall demand, which can help lower prices.
- As a result, Alice and Bob,
- Residents of Country C,
- Find that they have less money to spend.
Alice decides to delay her plans to buy a new car while Bob cancels his planned purchases. Consumer demand drops and businesses see a decline in sales. This helps cool down the economy and control the rising prices.
Contractionary fiscal policy
Contractionary fiscal policy involves reducing government spending and increasing taxes to slow economic growth and combat inflation. By taking money out of the economy, the government aims to reduce overall demand, which can help lower prices.
Imagine that the government of Country C wants to slow down inflation by increasing taxes. As a result, Alice and Bob, residents of Country C, find that they have less money to spend. Alice decides to delay her plans to buy a new car while Bob cancels his planned purchases. Consumer demand drops and businesses see a decline in sales. This helps cool down the economy and control the rising prices.