Fiscal policy is a branch of economic policy that sets the budget, and its components, public spending and taxes as control variables to ensure and maintain economicstability, cushioning fluctuations in economic cycles and helping to maintain a growing economy andfull employment without inflation alta.1 the birth of Keynesian macroeconomic theoryshowedthat the fiscal policy measures impact heavily on short-term variations in output, employment and prices.
Final goals of fiscal policy
As stated above the main objectives of all fiscalpolicy are:
Accelerating economic growth.
Full occupation of all the productive resources of society, both human and materialcapital.
Full price stability, defined as the generalprice index to suffer no significant elevations or reductions.
Expansionary fiscal policy: is when measures are taken to generate increased public spending or tax cutsContractionary fiscal policy: is when decisions are made to have a reduced government spending or raise taxes, or a combination of both.
Is proposed by John Maynard Keynes, whichproposes innovative theories. For example:
He says that Say's Law ("supply creates its own demand") is not met, as there may beeconomic balance but there is much unemployment.
Believes thatthe state is the one who should attempt to resolve the problem of unemployment (as opposed to the classics and the monetarists, who believe that is solvedby itself). To do so, the state hasto control aggregate demand through fiscal policy.
The state of full employment is a transitory, and the economy is fluctuating.
These revolutionary theories are beginning tomacroeconomics as a science.
Some concepts involved in the theory of Keynes are:
Marginal propensity to consume
Aggregate supply, with a horizontal section (section Keynesian)