Editing Macroeconomics (section)

===Fiscal policy===
{{Further|Fiscal policy}}

Fiscal policy is the use of government's revenue ([[tax]]es) and [[Government spending|expenditure]] as instruments to influence the economy.

For example, if the economy is producing less than [[potential output]], government spending can be used to employ idle resources and boost output, or taxes could be lowered to boost private consumption which has a similar effect. Government spending or tax cuts do not have to make up for the entire [[output gap]]. There is a [[Fiscal multiplier|multiplier effect]] that affects the impact of government spending. For instance, when the government pays for a bridge, the project not only adds the value of the bridge to output, but also allows the bridge workers to increase their consumption and investment, which helps to close the output gap.

The effects of fiscal policy can be limited by partial or full [[Crowding out (economics)|crowding out]]. When the government takes on spending projects, it limits the amount of resources available for the [[private sector]] to use. Full crowding out occurs in the extreme case when government spending simply replaces private sector output instead of adding additional output to the economy. A crowding out effect may also occur if government spending should lead to higher interest rates, which would limit investment.<ref>{{cite journal |last1=Arestis |first1=Philip |last2=Sawyer |first2=Malcolm |title=Reinventing fiscal policy |journal=Levy Economics Institute of Bard College |date=2003 |issue=Working Paper, No. 381 |url=https://www.econstor.eu/bitstream/10419/31523/1/503961485.pdf |access-date=7 December 2018}}</ref>

Some fiscal policy is implemented through [[automatic stabilizers]] without any active decisions by politicians. Automatic stabilizers do not suffer from the policy lags of [[Discretionary policy|discretionary fiscal policy]]. Automatic stabilizers use conventional fiscal mechanisms, but take effect as soon as the economy takes a downturn: spending on unemployment benefits automatically increases when unemployment rises, and [[tax revenue]]s decrease, which shelters private income and consumption from part of the fall in market income.<ref name=Sørensen/>{{rp|657}}