Fiscal policy refers to the government's use of spending and tax policies to influence the economy. When the government increases its spending for defense purposes or raises personal income tax rates, it affects the total level of spending in the economy and, hence, will affect the overall macroeconomic activity of a nation measured by such factors as gross domestic product (GDP), employment, and inflation. This is true for almost any change in spending or taxes. Any change in government spending or taxes will also affect the government's budget deficit. An increase (decrease) in spending or a decrease (increase) in taxes will increase (decrease) the government's budget deficit for a given state of the rest of the economy. Because the government must borrow ...