Unit 3.6·Macroeconomics

Fiscal Policy Basics

Demand Management (Fiscal Policy)

AO2

Syllabus requirement

Includes sources of government revenue and types of government expenditure.

Assessment objectives

AO2 Application and Analysis

Summary

Fiscal policy uses changes in taxation and government spending to influence the overall level of economic activity and to pursue macroeconomic objectives such as low unemployment, sustainable economic growth and low inflation. As a form of demand-side management, fiscal policy affects aggregate demand directly and can also be used to redistribute income or provide public services and infrastructure. Fiscal policy is discretionary, meaning governments deliberately adjust taxes and spending to meet objectives.

Real-world examples for this unit

U.S. dollar relief payments and government support during the COVID-19 economic downturn

U.S. COVID-19 Fiscal Relief Response

Expansionary Fiscal Policy2020 to 2021

Japanese government spending flowing to households, infrastructure and businesses to stimulate the economy.

Japan's 2025 Economic Package: Expansionary Fiscal Policy

Expansionary Fiscal Policy2025–2026

Romanian government budget with higher taxes and restrained public spending reducing aggregate demand.

Romania's 2025–26 Fiscal Consolidation: Contractionary Fiscal Policy

Contractionary Fiscal Policy2025–2026

German public investment in railways, digital networks, energy infrastructure and schools financed through a long-term infrastructure fund.

Germany's €500bn Infrastructure Fund: Fiscal Policy and Long-Run Growth

Expansionary Fiscal Policy2025–2036