The state of fiscal policy is usually summarized by looking at the impact
between what the government pays out and what it takes in that is
the government deficit
Fiscal policy is said to be tight or loose
when revenue is higher than spending (the government budget is in surplus) and contractionary
or expansionary when spending is higher than revenue (the budget is in deficit)
Often the focus is not on the level of the deficit,but on the change in the deficit.
The most immediate difference of fiscal policy is to change the aggregate demand for goods and services.
A fiscal expansion, for example, raises aggregate demand through one of two channels.
First, if the government increases purchases but keeps taxes the same, it increases demand directly.
Second, if the government cuts taxes or increases transfer payments, people's disposable income rises, and they will spend more on consumption.
This rise in consumption
will, in turn, raise aggregate demand.