21. Fiscal policy is taxation and government spending.

21. Fiscal policy is taxation and government spending. Expansionary fiscal policy occurs when the government increases government purchases of goods and services or decreases taxes. Increased government purchases increase overall spending directly. Lower taxes encourage more consumption and investment spending by leaving households and businesses with more disposable income. Disposable income is the amount of income a person has after the payment of taxes. For example, a typical pay stub states the amount of money earned and the amounts deducted for income and social insurance (FICA ) taxes. The remaining income, as represented by the amount of the paycheck, is disposable income. Contractionary fiscal policy occurs when the government decreases government purchases of goods and services or increases taxes. Decreased government purchases decrease overall spending directly. Higher taxes discourage consumption and investment spending by leaving households and businesses with less disposable income. Fiscal policy is explained in greater detail in module 10.