The adjustment of the level of government spending and taxation by policymakers in an effort to increase or decrease aggregate demand in the economy.
(Peter Dungan, Toronto PPG1002H and Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.)
In the short run, the primary effect of fiscal policy is on the aggregate demand for goods and services. By raising the overall level of government purchases or lowering the level of taxation, the government can raise the level of aggregate demand in the economy. Similarly, but reducing government spending or raising taxes, the government can lower aggregate demand and affect output and prices.