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When the federal government operates at a deficit, the debt grows- When the government has a surplus, the debt decreases. For how many years does the graph show a surplus?

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Fiscal Policy

You may recall from your reading of Chapter 23 that the federal government can try to use taxes and spending to help the economy grow. This practice is known as fiscal policy.

Fiscal Policy In Theory

In theory, the government can stimulate the economy during a recession by increasing spending and cutting taxes. Of course, these steps might also increase deficits. That would drive up the federal debt, creating problems for future generations.

When the economy begins to grow ago in, less stimulus is needed. In those times, the government can reduce spending and increase taxes.This would produce a surplus, which could lower government debt.

Fiscal Policy in Practice

In practice, these decisions are difficult to make. Many people want lower taxes regardless of the state of the cconomy. Many people also want government services, so the federal government has a difficult time cutting spending even when the economy is booming. As a result, the

Chapter 25 Government Finances 555

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