What is Fiscal Policy and How Does it Apply to Your Portfolio

portfolioFiscal policy represents the government’s ability to influence the economy through taxation and spending. By using tools known as ‘automatic stabilizers’, the government is able to control the fluctuations in the economy, and ensure that the business cycles therein are stabilized. The objective of these policies is to then both influence the application of funds that are directly minted in an expansionary monetary policy, and to ensure that government incomes are balanced with appropriate outflows.

In general, the goals of fiscal policies surround the stimulation of demand through either encouraging or discouraging demand. This is accomplished by examining the impacts of certain measures in light of a figure known as the market’s marginal propensity of consume. The MPC measures the market’s willingness to spend each new dollar they earn from a fiscal policy. Continue reading