Fiscal policy

Fiscal policy is conducted by a country's government. Fiscal policy aims at reducing unemployment and inflation. Fiscal policy can control demand in the country by changing government expenditure and revenue.

There are different theories about how fiscal policy should be conducted and they depend on the conditions that exist in the economy. Fiscal policy should be conducted differently depending on whether it's fixed exchange rates or variable exchange rates. Fiscal policy is conducted differently also depending on how sensitive the economy is to some changes.

The traditional fiscal policy theory is to increase government spending in a recession and cut public spending in a boom. This type of fiscal policy is called stabilization policy and are based on the theories of John Maynard Keynes (A prominent economist).