Final answer:
Fiscal policy involves changes in government spending and tax policy to manage the economy. Expansionary fiscal policy includes actions like increased federal spending on public projects, while contractionary policy might involve raising taxes. Not all spending and taxation changes, such as automatic budget payments, are considered as deliberate fiscal policy.
Step-by-step explanation:
Fiscal policy is the government's approach to influencing the economy through changes in government spending and taxation. An example of a fiscal policy would be an increase in federal spending on infrastructure to stimulate economic growth, which is considered an expansionary fiscal policy because it is likely to shift the aggregate demand outward. On the other hand, raising taxes to reduce a budget deficit would be an example of a contractionary fiscal policy, as it could shift aggregate demand inward.
Not all changes in federal spending and taxes qualify as fiscal policy. For instance, regular payments on existing debt or mandated spending that adjusts based on legislative formulas and not active decision-making, such as Social Security payments that increase with inflation, are not typically considered active fiscal policy.