Macro: Unit 3.2 -- The Effects of Fiscal Policy

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In this step you'll learn about fiscal policy and its effects on the economy. Fiscal policy is the use of government spending and taxation to influence the economy. Expansionary fiscal policy is when the government increases its expenditures and decreases personal taxes to stimulate aggregate demand. Contractionary fiscal policy is when the government decreases its expenditures and increases personal taxes to reduce aggregate demand. Both types of fiscal policies have a multiplier effect that causes a wave of new spending in the aggregate economy, leading to a degree of short-run economic growth or contraction.