Fiscal policy is the government’s use of taxation and spending to influence economic activity and to achieve specific economic and social objectives. To eliminate the gap, a government must use a combination of taxation, government spending and transfer payments to achieve its desired economic goals. The specific measures used to close the gap will depend on the particular situation.


Taxation is a key tool for governments to use in closing the gap. By increasing taxes, the government can raise revenue to help cover the cost of public spending. This can be done through increasing income taxes, raising excise taxes on certain goods or services, or introducing new taxes.

Government Spending

Government spending can also help close the gap. This can include spending money on public infrastructure projects, such as roads and bridges, or providing funds for various social programs, such as health care and education. Government spending can also be used to stimulate the economy by creating jobs or providing incentives for businesses to invest.

Transfer Payments

Transfer payments are payments made by the government to individuals or groups to provide financial assistance. Examples of transfer payments include unemployment benefits, Social Security payments, and welfare payments. These payments can help close the gap by providing financial assistance to those in need, which can help stimulate economic activity.

Related Questions

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