Policy makers use fiscal policy to stabilize the economy from "summary" of Principles of Macroeconomics by N. Gregory Mankiw
Policy makers can use fiscal policy as a tool to stabilize the economy. Fiscal policy refers to the use of government spending and taxation to influence the economy. During economic downturns, such as a recession, policy makers can use expansionary fiscal policy to boost aggregate demand and stimulate economic activity. This can be done through increasing government spending on infrastructure projects, unemployment benefits, or tax cuts to increase disposable income.
On the other hand, during periods of high inflation or economic overheating, policy makers can implement contractionary fiscal policy to cool down the economy. This involves reducing government spending and increasing taxes to reduce aggregate demand and prevent the economy from overheating. By adjusting government spending and taxation levels, policy makers can influence the overall level of economic activity in the economy.
Fiscal policy can be a powerful tool in stabilizing the economy because it ca...
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