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A combination of monetary and fiscal policies designed to stabilize a macroeconomy. Fiscal policy involves government spending and taxing, while monetary policy is designed to target the money supply and interest rate.
Fiscal and monetary policies can be expansionary or contractionary. Expansionary policies are intended to stimulate employment and output, while contractionary policies are implemented to prevent or curb inflationary pressures.
Fiscal policy is expansionary when a government gives a tax cut to increase disposable income or spends money (deficit financing) to increase employment and output. John Maynard Keynes used a multiplier theory to show how an increase in initial (autonomous) spending can generate a multiplier effect to stimulate aggregate consumption. Some people are apprehensive about the effects of the multiplier theory because of leakages and inflation.