Fiscal Policy means influencing the economy by using the spending levels and tax rates. Unlike monetary policy which is the one that deals with the bank's influence over a nation's money supply. John Maynard Keynes, an English economist created the Keynesian Theory, meaning economic instability should be corrected with government intervention.
"Keynes recommended that, during <u>periods of recession,</u> the government should increase spending in order to “prime the pump” of the economy. At the same time, he recommended, it should decrease taxes in order to give households more disposable income with which they can buy more products. "
During a depression or an economic downturn. Indeed, Keynes sustained that during a depression or a recession, consumer demand shrinks to its minimum which in turn cause unemployment as factories close because nobody is buying their products and that creates more unemployment which in turn further decreases consumer demand and the system engages in a vicious cycle that further weakens the economy.
Keynes recommended that the only and best solution was to apply a fiscal policy, on in layman’s terms, government spending in massive infrastructure projects that will stimulate economic activity by boosting employment and demand for products and services, both directly and indirectly. However, Keynes also indicated that a reduction or an expansion of the interest rates was necessary as well, depending in the economic circumstances.
