Final answer:
Fiscal policy refers to the federal government's use of taxation and spending to influence the economy, either by stimulating economic growth during recessions or controlling inflation during boom periods.
Step-by-step explanation:
The federal government's purposeful manipulation of taxes and spending to stimulate the economy or rein in inflation is known as fiscal policy. This aspect of economic policy involves changes in taxation and government spending to influence aggregate demand and the overall economic conditions. When governments reduce taxes or increase public spending, they aim to stimulate economic activity and reduce unemployment. Conversely, to cool off an overheating economy and curb inflation, taxes may be increased, and spending cut. This intentional adjustment of fiscal tools impacts both short-term economic performance and the long-term health of the economy.
Government spending and taxes, while affecting the whole economy, are particularly leveraged in fiscal policy to address various macroeconomic issues. During recessions, government spending can be increased to prop up demand, while in periods of growth, restraint can help manage budget deficits. The effects of fiscal policy on government budgets and the ongoing debate about the right balance between taxation and spending reflect differing philosophies on the role of government in the economy.