Fiscal policy

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In 1837, there was an economic crisis, especially in the state of New York. This image tries to illustrate what the situation was like, with regards to fiscal policy. The image appeard in the Times, that year
The model of the economy has cycles, which usually look like the picture.

When a state uses taxes and government spending to influence the economy, this is known as fiscal policy in economics and political science. The state can influence the following parameters:

There are two basic kinds of taxes: those on revenue, and those on economic activity, usually called excise. Lowering the excise taxation will lead to increased economic activity, for example. Changes in welfare also have an impact on economic activity.

In general, fiscal policy is cyclic: Effects which result from changes in fiscal policy need some time until they can be observed.

Certain schools of thought think that fiscal policy should not be used to influence the economy. This is the case for Monetarism, which demands that keeping money at its value is the most important goal.