Fiscal Policy

There are three economic policies that governments use to influence economic activity and to achieve their macroeconomic policy objective, and fiscal policy is one of the main policy.
Fiscal policy: the taxation and spending decision of a government, in order to influence Aggregate Demand (AD) and the level of economic activity.
AD is the total level of planned expenditure in an economy. AD=C+I+G+(X-M)
Government can raise AD by increasing its own spending and/or reducing taxation, eg increase government spending on transport, or at the areas of health or education, this will have multiplier effect, causing AD raising even further.
A cut in income tax will increase people’s disposable income, this will raise consumption. Lower corporation tax bring increase ability of firms to invest and in the result will be increase AD.
Expansionary FiscalPolicy:
Increase government spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income(C).This will worsen the governmentt budget deficit. they do it to increase AD and reduce unemployment. But it can lead to nflation and increase imports.
Contractionary fiscal policy:
Decreae government spending, increase tax-will reduce consumer spending,this will lead to an improvement in the government budget deficit.
But deflationary policy involves measure to reduce AD, it is cuts in government spending and/or rises in taxes.