Another important role of fiscal policy is to help stabilize the health of the economy. In terms of balancing the economy, there are three strategies used: expansionary fiscal policy; contractionary fiscal policy; and neutral fiscal policy.

When governments pursue expansionary policy, they can decrease taxes, increase spending or do a combination of both with an objective of stimulating economic growth. With the contractionary method, the government will raise taxes or control its own spending in an effort to cool growth. Finally, in a neutral policy, there is no attempt to change the course of the economy so no change to income or expenditures is made.

This form of policy is one of two that is typically wielded by a nationâ??s government to manage the economy. The other method is through controlling the money supply, which is termed appropriately enough monetary policy.