Putting It Together: Fiscal Policy


The goal of this module was to teach you to understand what government budgets consist of, and how fiscal policy affects the economy. You learned how to:

  • Identify the major spending categories and major revenue sources in the U.S. Federal budget
  • Identify the major spending categories and major revenue sources in U.S. state and local budgets
  • Define fiscal policy, identifying the roles of tax rates and government spending.
  • Differentiate between discretionary and automatic fiscal policy
  • Compare/Contrast expansionary/contractionary fiscal policies
  • Compare/Contrast the way tax changes and government spending changes work


You learned that the federal government spends most of its budget in a small number of areas, including national defense, social security, other social welfare programs, healthcare and interest on the federal debt. Most federal tax revenue comes from individuals’ income, though some comes from corporate profits.

State and local governments spend the majority of their budgets on education and transportation, while their tax revenue comes primarily from property and sales taxes. Some states don’t even have an income tax.

The balance on a government budget is not always easy to read, since budget balances change automatically, going into deficit during economic slowdowns and going into surpluses (or smaller deficits) during economic booms.

Congress can intentionally try to stimulate the economy using expansionary fiscal policy, either tax cuts or increases in government spending. Congress can also try to slow the economy down if is overheating by using contractionary fiscal policy, either tax increases or spending cuts.

Watch this video to review fiscal policy:


We will develop a more sophisticated understanding of fiscal policy in a future module, but first we need to learn about monetary policy.