What is the relationship between fiscal policy and inflation?

The relationship between fiscal policy and inflation is the fact that fiscal policy is a macroeconomic tool that the government uses to influence the level of economic activity in the country. Such fiscal policies are used to achieve the desired effect in the economy after analyzing economic trends in the economy. If the analysis reveals undesirable economic trends such as inflation, the government could use fiscal policy as one of the methods for reversal of the trend or under control.

The two main vehicles for the transmission of fiscal policy in the economy are patterns of aggregated government expenditure and adjustment at the level of taxation or formulas. In this sense, fiscal policy and inflation are related to the fact that government regulations to these two factors have an inflation level. Governments usually perform a constant evaluation of the economy by studying the outcome of the periodic business. When it observes the fact that the level of inflation grows above the required level, it uses fiscal policy as a means of controlling basic factors of demand andconsumption that supports such inflationary trends.

Fiscal policy and inflationary connection can be observed in a way that different regulations of the tax system affect the level of inflation in the economy. Assuming that the government decides to increase the income tax level, this type of policy will have a wider effect that affects the level of inflation. Such an increase in taxation of personal income will lead to a corresponding reduction in the total one -off or spending income of consumers. It is assumed that if consumers do not have so much money to spend their net wages after calculating, they will carry out reversal in their expenditure and consumption habits, R, coincidence in the economy and also reduce inflation levels.

Another connection between fiscal policy and inflation can be seen in the effect that has contraction fiscal policy on the economy. When the government follows undesirable inflationary trends, such a trend fromAttach or reduce the reduction of its expenditure in relation to tax revenues for a year. In such a situation, the government limits its expenditure. Such a practice will serve to reduce the level of economic activity, causing a reduction in the amount of money in the economy and reducing the level of inflation.