We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is the Role of Fiscal Policy in Crisis?

Helen Akers
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The most important role of fiscal policy in crisis is to prevent further economic deterioration and restore overall vitality to the macroeconomy. One of the techniques used by most national governments is to force an increase in the money supply by reducing interest rates. Governments also attempt to increase overall spending, consumer confidence, and production output through fiscal policy. A national government may temporarily reduce taxes and increase its own spending in order to improve the overall health of the macroeconomy, rather than the financial health of individual population segments.

In order to prevent a complete economic collapse, a national government will employ fiscal policy in crisis in order to stimulate aggregate demand. An economic crisis is typically referred to as a severe recession or depression, where the monetary value of an economy's output stagnates or sharply declines. This usually occurs due to a gap between the costs of basic goods and services and the average consumer's income, in addition to businesses' ability to make adequate profit margins. When the government reduces the interest rate that it charges banks to borrow money, the hope is that consumers and businesses will be encouraged to secure the financing they need to purchase big ticket items such as homes, vehicles, and new facilities.

By encouraging an increase in spending, the average demand for goods and services usually goes up. Using the techniques of a fiscal policy in crisis helps stimulate the overall output and activity of a macroeconomy, but it does not guarantee that every business or individual will benefit. Tax incentives may be given to businesses in order to create more jobs or even higher-paying jobs. Temporary reductions in consumer taxes or incentives to purchase certain items, such as homes, might also be given to provide relief from financial burdens and allow for additional discretionary income.

Besides encouraging more consumer spending, government spending is another common part of fiscal policy in crisis. Sometimes consumers do not spend enough to lift a macroeconomy out of recession, despite interest rate reductions and tax incentives. Since a portion of an economy's gross domestic product (GDP) consists of government spending, it may invest in several projects, such as military experiments, energy research, or improvements to transportation infrastructures. In order to complete many of these projects, the government must employ outside contractors, which in turn creates jobs and pumps more money back into the consumer sector.

As the results of using a fiscal policy in crisis are seen, consumers and businesses tend to gain confidence in the economy's potential and health. They begin to become less conservative and restrictive in their willingness to spend and invest. In order to meet increased demand, suppliers must find ways to supply more products and services, which increases the amount of money circulating in the macroeconomy. Governments may then start to raise interest rates slightly to discourage high inflation and keep growth at an optimal rate.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Helen Akers
By Helen Akers
Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a background in creative writing, she crafts compelling stories and content to inspire and challenge readers, showcasing her commitment to qualitative impact and service to others.
Discussion Comments
Helen Akers
Helen Akers
Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.