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Answer :
Final answer:
Fiscal policy involves changes to tax rates and government spending to manage the economy. It includes strategies like expansionary and contractionary policies to influence aggregate demand and supply. Adjustments in fiscal policy can shift economic growth and stabilize inflation. Therefore, the correct option is 1) tax rates, government spending
Explanation:
Fiscal policy is when changes are made to tax rates and government spending to accomplish macroeconomic goals such as price stability, full employment, and economic growth. Governments adjust fiscal policy by modifying the level and composition of taxation, as well as altering government spending in various sectors, aiming to influence the aggregate demand and supply within the economy. There are three main types of fiscal policy: neutral, which is used when an economy is at equilibrium; expansionary, to stimulate the economy during a recession by increasing spending or cutting taxes; and contractionary, to cool down an overheating economy by reducing spending or raising taxes.
The tools of fiscal policy—tax policy changes and government spending modifications—have the power to shift the aggregate demand either outward or inward, which can be visualized graphically. For instance, expansionary fiscal policy moves aggregate demand outward, potentially driving economic growth, while contractionary policy pulls it inward to help control inflation. These strategies are employed over time in accordance with shifts in the aggregate supply curves as the economy grows and changes. National governments use fiscal policy, alongside monetary policy, as a means to steer the macroeconomy towards desired outcomes.
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