Define the term fiscal policy and explain how fiscal policy can be used in response to economic conditions.

What will be an ideal response?

The government's efforts to maintain a stable economy are made mainly through its taxing and spending decisions, which together are referred to as its fiscal policy. The main school of thought associated with fiscal policy is demand-side economics, which originated in the theories of economist John Maynard Keynes. In different forms, demand-side economics has influenced government policy since the New Deal programs of Franklin D. Roosevelt in the 1930s. When there is an economic downturn, government can increase its spending or cut individual taxes as a means of stimulating consumer (demand-side) spending. When the economy is inflationary, the opposite actions can be taken as a way of dampening consumer demand. Fiscal policy can also take a supply-side form, as it did in part during the Reagan and George W. Bush years. Supply-side emphasizes business production and investment. The economy can be stimulated through a reduction in taxes on firms and high-income individuals.