When crowding out occurs, it reduces the effectiveness of fiscal policy.
In order to affect economic conditions, particularly macroeconomic conditions, fiscal policy refers to the use of government spending and tax policies. These include employment, the total demand for goods and services, inflation, and economic expansion.
In order to boost demand and stimulate the economy during a recession, the government may reduce tax rates or increase spending. As an alternative, it might increase rates or reduce spending to slow down the economy and fight inflation.
Comparing fiscal policy to monetary policy, which is implemented by central bankers rather than elected government officials, is common practice.
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