When a state uses taxes and government spending to influence the economy, this is known as fiscal policy in economics and political science. Idea from John Maynard Keynes. The state can influence the following parameters:
- Aggregate demand and the level of economic activity
- How resources are allocated
- How wealth is distributed
There are two basic kinds of taxes: those on revenue, and those on economic activity, usually called excise taxes. 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.