Economics studies monetary decision-making and can be viewed from an individual or group perspective. Fiscal policy uses taxes and government spending to influence the economy, while monetary policy adjusts interest rates and money supply. Macroeconomics and fiscal policy are related through expansionary, neutral, and contractionary policies. It’s important for citizens to stay informed on these matters.
Economics is the study of decision-making, usually related to monetary issues that affect everyone in the world. This science can be viewed from the point of view of an individual, called microeconomics, or from the broader perspective of a group or an entire economy, as in the case of macroeconomics. Macroeconomics is affected by a myriad of factors that are not always understood, even by experts. Macroeconomics and fiscal policy are intertwined in a logical sense, with policymakers directly affecting the economy through changes in the way the government regulates industry.
Fiscal policy can be defined as the use of taxes and government expenditures to influence the economy. If government is viewed as a business, taxation would be revenue collected from taxpayers, while expenditure would be expenditure on programs and services. Tax rates and expenditures vary with current policy, so it’s easy to see how macroeconomics and fiscal policy are related.
The other primary way the economy is changed is through monetary policy. Macroeconomics and fiscal policy are related in a similar way to the way in which macroeconomics and monetary policy are linked. One difference, however, is that monetary policy seeks change through adjustments in interest rates and the money supply, whereas fiscal policy is strictly based on spending and taxes.
There are three main ways in which macroeconomics and fiscal policy are related. The three perspectives for fiscal policy are expansionary, neutral, and contractionary. Expansion policy attempts to expand the economy through spending that exceeds revenue or taxes. While this can be effective in boosting a nation’s economy, it risks future debt and often relies on unproven hypothetical measures. The more conservative route of contractionary policy focuses on collecting more money than is spent, lowering the federal debt at the risk of causing economic stagnation.
The neutral point of view of macroeconomics and fiscal policy is when tax expenditures and tax revenues are equal. There are inevitably differences between the two, however, making this state quite unattainable outside of theory. Many laws, policies and regulations depend on the government to implement the fiscal and monetary policies that affect the economy and every individual within it. Therefore, it is important for the average citizen to remain educated on such matters so that he or she can vote into office the representatives they believe will do the best job of improving the economy.
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