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Word Count: 731
Fiscal policy and monetary policy which is concerned with money are the two most important components of a governments overall economic policy and governments use them in an attempt to maintain economic growth high employment and low inflationFiscal policy is expansionary when taxation is reduced or public spending is increased that stimulate total spending in the economy Expansionary policy might occur when a government feels its economy is not growing fast enough or unemployment is too high The government can increase spending or cut taxes and individuals and businesses will have more money When individuals or firms increase their purchases they raise demand creating jobs and generating more spending resulting in higher employment and a growing economyFiscal policy is contractionary when taxation is increased or public spending is reduced in order to limit demand and slow the economy A contractionary fiscal policy reduces the amount of money in the economy available for purchasing goods Tools and factors the government uses in managing its fiscal policies include the level of economic growth or unemployment likely in the future Once these decisions are made the government can decide how to raise revenue Revenue is generated through a combination of different taxesAnother important decision a government must make regarding fiscal policy is whether to run a budget deficit by spending more money than the government raises Deficits can be financed in two ways borrowing or printing more money If the government borrows money it will decrease the supply of money available in the economy for lending and the cost of borrowing money the interest rate may rise The overall economic effect of fiscal policy especially when combined with the uncertainties of the forthcoming health reform package has impaired a number of unconventional unknowns to the economies outlook says the author about Alan GreenspanDecisions on fiscal policy are influenced by such as beliefs about the size of the role that governments should play in the economy or the likely
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