Fiscal policy refers to the: group of answer choices

1. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
2. manipulation of government spending and taxes to achieve greater equality in the distribution of income.
3. altering of the interest rate to change aggregate demand.
4. fact that equal increases in government spending and taxation will be contractionary.

The correct answer is option 1.

Explanation:

Fiscal policy is a tool that is used by the government to correct fluctuations in economic activities. It involves changing government spending and taxes to have the desired effect on the variables such as output, price level, and employment.  

In case of an inflationary gap, contractionary fiscal policy is adopted. It involves decreasing government spending or increasing taxes or both.  

In case of a recessionary gap, expansionary fiscal policy is adopted which involves decreasing taxes or increasing government spending or both.

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