How does fiscal policy contribute to macroeconomic objectives?

Fiscal policy contributes to macroeconomic objectives by influencing aggregate demand, stabilising economic growth, and managing inflation and unemployment rates.

Fiscal policy, which involves the government's use of taxation and public spending, plays a crucial role in achieving macroeconomic objectives. These objectives include economic growth, price stability, full employment, and a sustainable balance of payments. The government can manipulate fiscal policy to influence the level of aggregate demand in the economy, which in turn affects economic activity.

Economic growth, a key macroeconomic objective, can be stimulated through expansionary fiscal policy. This involves either a decrease in taxes or an increase in government spending, or both. Lower taxes increase disposable income, encouraging consumer spending and investment by businesses. Higher government spending directly increases demand in the economy, leading to higher output and employment. Conversely, in times of overheating economy, contractionary fiscal policy, involving higher taxes or lower government spending, can be used to slow down economic growth and prevent inflation.

Price stability, another important objective, is also influenced by fiscal policy. Inflation can be managed through contractionary fiscal policy. By reducing aggregate demand, the government can put downward pressure on prices. On the other hand, during periods of deflation, expansionary fiscal policy can be used to increase demand and push prices up.

Fiscal policy also plays a role in achieving full employment. By stimulating demand through lower taxes or higher government spending, the government can increase the demand for labour, leading to lower unemployment. However, it's important to note that fiscal policy can only reduce demand-deficient unemployment, not structural or frictional unemployment.

Lastly, fiscal policy can contribute to a sustainable balance of payments, another macroeconomic objective. By influencing the level of domestic demand, fiscal policy can affect the demand for imports and exports. For instance, contractionary fiscal policy can help improve a current account deficit by reducing domestic demand and hence the demand for imports.

In conclusion, fiscal policy is a powerful tool that the government can use to influence the economy and achieve macroeconomic objectives. However, it's important to remember that fiscal policy has its limitations and potential downsides, such as the risk of causing budget deficits and public debt. Therefore, it needs to be used judiciously and in conjunction with other policies.