Fiscal policy involves the government expenditures and revenue collections. A government implements a fiscal policy by using two tools including government spending and taxation. By changing the level of compositions of these two tools, the fiscal policy impacts different variables in the economy. For example, by changing taxation and government spending, the variables like aggregate demand in the economy, pattern of resource allocation and income distribution can be impacted. Therefore, for the implementation of the fiscal policy, the tools of fiscal policy are changed.
