It is also known as fiscal policy. It is a method in which the government adjusts the taxation and spending level for directly influencing an economy. This policy goestogether with the monetary policy in order to attain different economic goals. This particular policy gained popularity in 1930 after it was advocated by the British economist named John Keynes. He explained that when a nation suffers from recession, spending large amount of money for the consumers could cause an economic growth. This process was fulfilled by lessening the taxes and can also be done by risingthe spending of the government.
Various Fiscal Policies
Expansionary, contractionary and neutral are three important financial policies. The neutral is in which the spending of the government is equal to the revenue in a rough manner. Contractionary is in which the spending of the government is lesser when compared to the revenue. On the other hand the expansionary is the spending of the government which is more than the revenue.
Effects of these Policies on the Exchange Rates
An effect of this policy on currency depends on an economic situation. As every country is different and the economic surrounding is repeatedly changing, it is difficult to tell how this particular policy affects the rate of exchange. Let us imagine that the government is suffering from a budget deficit because of an expansionary monetary policy. For financing this deficit, government works with central bank for printing the fresh money.The new printed currency can be utilized by government in the projects of economic development. The rise in the supply of money ends up being the inflationary and weakens the value of domestic money.