The fiscal theory of the price level is the idea that government fiscal policy affects the price level: for the price level to be stable (to control inflation), government finances must be sustainable: they must run a balanced budget over the course of the business cycle, meaning they must not run a structural deficit.
It is a heterodox economic theory, in contrast to the mainstream economic theory of the price level, which states that the price level is primarily or exclusively determined by the money supply in the long-run.
These two contrasting views of prices may or may not contradict one another. By its proponents, the fiscal theory is seen as complementary to the quantity theory, not as replacing it; by its detractors, the fiscal theory is seen as incorrect, and either having no effect or being simply wrong-headed.
Read more about Fiscal Theory Of The Price Level: Statement, History, See Also
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