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Chapter 7: Factors influencing FX markets > Government budget and fiscal policy

Government budget and fiscal policy

The government budget and fiscal policy refers to the mix of taxes and government spending undertaken by the controlling regime of the day. Some distinctions that FX traders need to comprehend are:

• Tighter fiscal policy refers to a situation in which the government favours higher taxes and less government spending. The net result of tighter policy is less money is flowing through the economy as people have less in their pockets after tax and less money is being spent by the government. Eventually this results in a slowdown in economic activity, resulting in a similar outcome to higher interest rates, although without the need to actually raise interest rates.

• Easier fiscal policy refers to a situation in which the government favours lower taxes, leaving people with greater disposable income, and there is more government spending. The net result of easier policy is that more money is flowing through the economy, stimulating economic growth.


  

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