So What Is Fiscal Policy and How Does It Work...?

Hello viewers welcome to Info Thirst today we are going to talk about an economic concept known as Fiscal Policy and how it works. Before we get into the topic we would like you to SUBSCRIBE us by clicking the button in the navigation bar. Now that you have done that...So lets dive into it…

If you look at any economic graph it constantly fluctuates overtime, but as we know the economy is never at its potential. So when output is below potential it is known as RECESSIONARY GAP(where unemployment rate is high and there are more idol asset) And in some cases actual output can rise above actual potential of economy it is known as INFLATIONARY GAP(where unemployment rate low and there are no more idol asset), but its not sustainable. Point is every economy faces a boom and a recession. Now to make this rollercoaster ride smoother FISCAL POLICY plays a great role.

So what is Fiscal Policy...?  

Well understanding fiscal policy is quite simple, when the economy is going faster or slower than it needs to be, the government can step in and take control of the situation by changing government spending or taxes. 

So when the economy falls into RECESSIONARY GAP, the government can cut Taxes and increase government spending, that is known as expansionary fiscal policy. Basically, when this step is taken government spendings create jobs and then people who earn this additional spend and boost the economy. Similar logic is followed by tax deprivation.

But when the economy falls into INFLATIONARY GAP, the opposite thing happens. Government increase taxes and cut government spendings. And this is known as contractionary fiscal policy. We don't see this scenario much often.

Now the Question rises: Does the Fiscal policy actually work...? Well this is debatable. It is true that the economy heals itself in the long run, and some people like to go at turtle speed. But some think that rather than doing nothing it is better to do something and get consumer and business spending run again in the cycle. And many think this is a better option to go because what's the harm in trying.

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