Why is fiscal policy considered important for economic stability?

Fiscal policy plays a crucial role in maintaining economic stability primarily through its ability to manage inflation and unemployment. When the government implements changes in its spending and tax policies, it directly influences aggregate demand in the economy.

If the economy is experiencing high unemployment, the government can increase its spending on public projects, which creates jobs and stimulates demand. Conversely, if inflation is rising too quickly, the government might reduce its spending or increase taxes to cool off the economy, thereby helping to stabilize prices.

This balancing act is essential as it affects not just the immediate economic conditions but also the overall growth trajectory and health of the economy. By effectively utilizing fiscal policy, governments can address cyclical fluctuations and support sustainable economic growth, making it an important tool for achieving and maintaining economic stability.