Q.Explain the meaning of fiscal policy and state its main instruments.

Fiscal policy is how the government uses its own budget levers — taxes, spending, and borrowing — to steer the economy, and each lever works in its own way.

Fiscal policy refers to the deliberate use of the government's revenue (chiefly taxation), expenditure, and borrowing to influence the level of economic activity, employment, prices, and growth in the economy. It is implemented every year primarily through the government budget.

Main instruments:

1. Taxation. Raising tax rates withdraws disposable income and dampens private spending (useful to control inflation); lowering tax rates leaves more disposable income in private hands, boosting spending (useful to fight a slowdown).
2. Public expenditure. Higher government spending — on infrastructure, welfare programmes, or public employment — directly adds to aggregate demand and can generate jobs, especially valuable during a recession; lower spending has the reverse, contractionary effect. …

Students sometimes confuse fiscal policy with monetary policy — fiscal policy is the government's own budgetary lever (taxation, spending, borrowing), while monetary policy (interest rates, money supply) is controlled separ …