believed that the way to combat the prevailing recessionary climate was not to wait for prices and wages to adjust but to engage in expansionary fiscal policy instead.

Note: Classical view of Fiscal Policy is also referred to as Active Fiscal Policy. Keynesian view of Fiscal Policy is also referred to as Passive Fiscal Policy.

5.3. Discretionary and Automatic Fiscal Policy

Discretionary Fiscal policy is the change(s) in the level of active government taxation, and spending due to changes in the economy. These are changes that are often initiated in an attempt to meet some/all of the goals of economies such as full employment and stable prices. Some examples can be increasing spending on infrastructure to stimulate the economy and increase aggregate demand as well as the number of employed.

Automatic Fiscal policy are changes that are a result of past government regulations and tax laws, which are still in effect and adjust/stabilize spending in the economy without direct government intervention, through both the expansionary and recessionary periods of the business cycle. These include things such as progressive taxation, governmental assistance to agriculture and employment insurance.

Discretionary fiscal policy is made more difficult due to lags in recognizing the need for changed fiscal policy and the lags that occur with enacting the changed fiscal policy. Implementing the modified fiscal policy usually requires legislative action, which takes a long time to implement. One difficulty with proper timing is that forecasting economic activity is not an exact science. There is usually a lag between the time fiscal policy changes are needed and the instance that the need to act is widely recognized. Poorly timed fiscal policy could actually increase inflation and accelerate declines in the economy when the economy has already started to slow down.

Fiscal policy does have an advantage over monetary policy in the sense that increased government spending leads to an immediate increase in aggregate demand.