Fiscal Policy • What is government's role in our economy? Fiscal policy refers to how government taxing and spending policy can be used to influence the macroeconomy. In the short term, fiscal policy can be used to reduce the extremes of recession and inflation. If the economy is in recession, then an expansionary fiscal policy can increase aggregate demand through tax cuts and/or spending increases. If an economy is suffering inflation, then a contractionary fiscal policy can reduce aggregate demand through some combination of tax increases and/or spending cuts. • What are the various types of taxes the government will use? The government collects tax revenues and makes expenditures. If taxes collected exceed government expenditures in a given year, the government has a budget surplus. If taxes collected are exactly equal to expenditures in a given year, the government has a balanced budget. If taxes collected are less than the money spent in a given year, the government has a budget deficit. When a budget deficit occurs, the government
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