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Contractionary fiscal policy is used when actual incomes are more then the potential income output of the economy. Increased taxes and decreased governmental spending are signs of contractionary fiscal policy measures. Once economists have identified the multiplier and long run potential output of the economy, they are able to determine whether to follow a contractionary fiscal policy or expansionary fiscal policy...
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These concepts also help in determining the exact amount by which to change governmental expenditure and/or taxation to bring the econmy closer to its long run potential output.
Although fiscal policy measures are a positive and effective solution to economy woes, fiscal policy measures can be negatively affected...
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