Fiscal Policy
Fiscal Policy
Government decisions about taxation and spending used to influence economic conditions. Controlled by Congress and the President, not the Federal Reserve. Expansionary fiscal policy increases spending or cuts taxes to stimulate growth; contractionary policy decreases spending or raises taxes to slow inflation.
During the 2008 recession, Congress passed an economic stimulus package with tax rebates (expansionary fiscal policy). During periods of high inflation, Congress may raise taxes or cut spending (contractionary fiscal policy).
Fiscal policy (government taxation/spending by Congress) is often confused with monetary policy (interest rates and money supply controlled by the Federal Reserve).
How This Is Tested
- Distinguishing between fiscal policy (government) and monetary policy (Federal Reserve)
- Identifying expansionary fiscal policy (increased spending or tax cuts)
- Identifying contractionary fiscal policy (decreased spending or tax increases)
- Understanding the impact of fiscal policy on GDP and economic growth
- Recognizing the lag time before fiscal policy affects the economy
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Policy authority | Congress and President | NOT the Federal Reserve (that controls monetary policy) |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Marcus, an investment adviser, is meeting with a client concerned about rising unemployment and slowing economic growth. The client asks what government actions might help stimulate the economy. Congress is currently debating whether to increase infrastructure spending or raise corporate tax rates to reduce the budget deficit. Which action would be considered expansionary fiscal policy?
A is correct. Increasing infrastructure spending is expansionary fiscal policy because it injects money into the economy, creates jobs, and stimulates aggregate demand during a period of slow growth.
B is contractionary fiscal policy (raising taxes removes money from the economy). C is monetary policy, not fiscal policy (the Federal Reserve controls interest rates, not Congress). D is contractionary fiscal policy (reducing spending slows the economy, not stimulates it).
The Series 65 exam tests your ability to apply economic concepts to client situations. Understanding the difference between expansionary and contractionary fiscal policy helps you explain how government actions affect market conditions and investment portfolios.
Which governmental bodies control fiscal policy in the United States?
B is correct. Fiscal policy (government taxation and spending decisions) is controlled by Congress, which passes legislation, and the President, who signs or vetoes it.
A and D (Federal Reserve Board and FOMC) control monetary policy, not fiscal policy. C is incorrect because while the Treasury implements fiscal policy decisions, it does not make fiscal policy. Congress and the President do.
The Series 65 exam frequently tests the fundamental distinction between fiscal policy (Congressional/Presidential authority over taxes and spending) and monetary policy (Federal Reserve authority over interest rates and money supply). This is a high-priority concept.
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Access Free BetaCongress passes a $800 billion spending bill for infrastructure projects during a recession. Economists estimate the fiscal multiplier effect at 1.5x. What is the approximate total increase in GDP expected from this expansionary fiscal policy?
C is correct. Calculate: $800 billion × 1.5 (multiplier) = $1.2 trillion total GDP increase. The fiscal multiplier effect means each dollar of government spending generates additional economic activity as recipients spend their income.
A ($533 billion) incorrectly divides instead of multiplies ($800B ÷ 1.5). B ($800 billion) ignores the multiplier effect entirely. D ($2.4 trillion) incorrectly uses a 3.0x multiplier instead of 1.5x.
While the Series 65 exam has limited calculation questions, understanding the fiscal multiplier effect is important for analyzing how government spending impacts GDP growth and why fiscal policy changes ripple through the economy over time.
All of the following are examples of expansionary fiscal policy EXCEPT
C is correct (the EXCEPT answer). Raising corporate tax rates is contractionary fiscal policy because it removes money from the economy and reduces business spending capacity, slowing economic growth.
A is expansionary: tax cuts leave more money in consumers' hands, increasing spending. B is expansionary: increased government spending directly injects money into the economy. D is expansionary: tax credits incentivize spending (home purchases) and stimulate economic activity.
The Series 65 exam tests your comprehensive understanding of fiscal policy tools. You must distinguish between expansionary policies (tax cuts, increased spending) that stimulate growth and contractionary policies (tax increases, spending cuts) that slow inflation.
During a period of high inflation and rapid economic growth, the government is considering policy options to cool the economy. Which of the following would be considered contractionary fiscal policy measures?
1. Reducing government spending on infrastructure projects
2. Increasing personal income tax rates
3. The Federal Reserve raising the federal funds rate
4. Decreasing corporate tax rates to encourage investment
A is correct. Only statements 1 and 2 represent contractionary fiscal policy.
Statement 1 is TRUE: Reducing government spending is contractionary fiscal policy that removes money from the economy and slows growth.
Statement 2 is TRUE: Increasing tax rates is contractionary fiscal policy that reduces consumer spending power and slows the economy.
Statement 3 is FALSE: While this would slow the economy, raising the federal funds rate is monetary policy (controlled by the Federal Reserve), not fiscal policy (controlled by Congress).
Statement 4 is FALSE: Decreasing corporate taxes is expansionary fiscal policy (stimulates growth), not contractionary.
The Series 65 exam tests your ability to distinguish between fiscal policy tools (Congressional taxation and spending decisions) and monetary policy tools (Federal Reserve interest rate decisions). You must also differentiate expansionary from contractionary measures across both policy types.
💡 Memory Aid
FISCAL = Government FINANCES. Think: "Congress Controls the Cash" (taxes and spending). NOT the Fed (that's monetary policy). Imagine Congress with a checkbook: writing bigger checks = expansionary, writing smaller checks = contractionary. The Fed controls interest rates, not spending.
Related Concepts
This term is part of this cluster:
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Monetary Policy
Actions by the Federal Reserve (central bank) to control money supply and intere...
Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: