What is an intended outcome of using fiscal policy effectively?

Using fiscal policy effectively is primarily aimed at influencing overall economic activity and employment levels. Fiscal policy involves government spending and taxation decisions designed to manage economic fluctuations and achieve macroeconomic objectives. When the government increases spending or alters taxation levels, it directly impacts aggregate demand—the total demand for goods and services in the economy.

For instance, by increasing government expenditures on infrastructure projects, a government can stimulate economic growth by creating jobs and increasing demand for materials and services. Conversely, when the economy is overheated, the government may reduce spending or increase taxes to cool down economic activity and curb inflation.

This capacity to influence output and employment makes fiscal policy a crucial tool for managing economic cycles, addressing unemployment, and promoting sustained economic growth.

While stabilizing currency exchange rates, enhancing productivity in manufacturing, and limiting international trade deficits are important economic considerations, they are not the primary goals of fiscal policy. Instead, those elements may be influenced by a range of factors, including monetary policy and structural economic changes, but they don’t directly capture the core function of fiscal policy, which is directly targeting the economy's overall activity and employment levels.