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Modern fiat economies run on Keynesian economic theory- specifically the idea that a sovereign government and its central bank should act as a counter-cyclical force on the private sector to smooth it out. In this framework, if the economy is performing very strongly, the government can run a fiscal...

Modern fiat economies run on Keynesian economic theory- specifically the idea that a sovereign government and its central bank should act as a counter-cyclical force on the private sector to smooth it out.

In this framework, if the economy is performing very strongly, the government can run a fiscal surplus, which sucks some money out of the economy and can be used to build a reserve for weaker times. During recessions, the government can deploy those reserves and run fiscal deficits, or issue extra debt to run fiscal deficits (if they don’t have much reserves), and those deficits inject some money into the economy at a time of weakness and illiquidity, and serve as a stimulus.

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