when private sector spending decreases the government can spend more or tax less in order to directly increase aggregate demand when the private sector is overly optimistic and spends too much too quickly on consumption and new investment projects the government can spend less or tax more in order to decrease aggregate demand 
this means that to help stabilize the economy the government should run large budget deficits during economic downturns and run budget surpluses when the economy is growing these are known as expansionary or contractionary fiscal policies respectively during the great depression of the 1930s u s unemployment rose to 25 and millions stood in bread lines for food the misery seemed endless president franklin d roosevelt decided to put an expansionary fiscal policy to work he launched his new deal soon after taking office it created new government agencies the wpa jobs program and the social security program which exists to this day these spending efforts combined with his continued expansionary policy spending during world war ii pulled the country out of the depression 2types of fiscal policiesto illustrate how the government can use fiscal policy to affect the economy consider an economy that s experiencing a recession the government might issue tax stimulus rebates to increase aggregate demand and fuel economic growth the logic behind this approach is that when people pay lower taxes they have more money to spend or invest which fuels higher demand that demand leads firms to hire more decreasing unemployment and causing fierce competition for labor in turn this serves to raise wages and provide consumers with more income to spend and invest it s a virtuous cycle or positive feedback loop alternately rather than lowering taxes the government may seek economic expansion by increasing spending without corresponding tax increases building more highways for example could increase employment pushing up demand and growth expansionary fiscal policy is usually characterized by deficit spending deficit spending occurs when government expenditures exceed receipts from taxes and other sources in practice deficit spending tends to result from a combination of tax cuts and higher spending in the face of mounting inflation and other expansionary symptoms a government can pursue contractionary fiscal policy perhaps even to the extent of inducing a brief recession in order to restore balance to the economic cycle the government does this by increasing taxes reducing public spending and cutting public sector pay or jobs 