Fiscal policy refers to the government's policy measures to impact aggregate demand and income in the economy. The primary policy tools are government spending and taxation. During economic recession, aggregate demand is low, to boost which government implements expansionary fiscal policy, by increasing government spending and/or by lowering tax rate (to boost consumption and investment demand). During economic boom, aggregate demand is very high leading to inflation, and government implements contractionary fiscal policy, by decreasing government spending and/or by increasing tax rate (to slow down consumption and investment demand).
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