3.6.1—Fiscal policy

Fiscal policy changes government spending, taxation and transfers to influence demand, output, employment, distribution and debt.

The budget affects aggregate demand directly and incentives indirectly; financing and implementation determine the net effect.

Name the instrument, target and likely transmission.

Higher public investment can raise demand now and productive capacity later.

A budget deficit is a flow in a period; debt is the accumulated stock.

Government revenue includes direct taxes, indirect taxes, sales of goods and services by state-owned enterprises, and proceeds from selling government assets. Expenditure includes current spending on recurring operations and wages, capital spending on long-lived assets such as infrastructure, and transfer payments that redistribute income without buying current output. Classify the item before predicting AD, capacity, equity or budget effects: an asset sale is revenue but not recurring tax income, while a transfer supports household income but is not direct government purchase of output.