Fiscal Policy and the Stock Market


Fiscal policy is the policies implemented by the government and legislative branches to artificially stimulate or slow down the economy. Adjusting the spending power and revenues can be implemented by changing taxation (both individuals and businesses) and government expenditure. These policies have an impact on the unemployment rate, inflation rate, and Gross Domestic Product (GDP). For example, when the government wants to stimulate the economy, it decreases taxes on businesses (and people) and increases government spending. This results in more demand for the products and higher inflation rates. Higher demand also results in higher production rates for the businesses. Therefore, the employment rate increases (lower unemployment rate).


There are two types of fiscal policy plans. First, expansionary fiscal policy is implemented during economic downturns and recessions to stimulate economic growth. Decreasing the tax rates and increasing the government spending happens during this time. However, the side effect of expansionary fiscal policy is increasing the inflation rate over time. Second, contractionary fiscal policy is implemented to slow down the economy. It is performed by increasing the tax rate and reducing government spending. This results in less purchasing power and less demand. Therefore, it is used as the regulator for the inflation rate.


In the end, government interference is necessary to balance economic growth to some degree. These forces should be in place to balance the unemployment rate, inflation rate, and GDP rate. It results in healthy economic growth. Another complementary tool used by the government to balance the economy is the monetary policy which is decided by the federal reserve.


Expansionary and contractionary fiscal policies are macro-economic factors that may play roles in the behavior of the stock market. During economic expansion, people and businesses have more money. Therefore, the stock market may benefit from it and goes up. However, during an economic contraction, less money is available to go to the stock market. Therefore, the market goes down. However, the stock market is very complex and its accurate prediction is almost impossible.

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