With fiscal policy the government influences the economy by changing how
the government collects and spends money. The most common tools that
the government enacts to effect fiscal policy include:
• Increased Spending on new government programs and initiatives (such as job creation programs). This has the effect of increasing demand for labor and can result in lower unemployment levels
• Automatic Fiscal Programs are programs that take effect immediately to help correct the slide in the economy. Probably the single best example of this is unemployment insurance which a person can file for as soon as they lose their job.
• Tax Cuts are another tool that government uses to stimulate demand for goods and services when the economy takes a turn for the worse. The effect of a tax break is to put more money back in the pockets of businesses and consumers which they can spend and put back to work in the economy.
Monetary Policy, on the other hand, involves the manipulation of the available money supply within the economy. likewise increasing the interest rates, CRR, SLR etc
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