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fiscal policy definition

The U.S. Congress avoided this problem by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013.. The lowest bracket remains at 10%, and the 35% bracket is also unchanged. Stocks rose on December 21, 2017, for the first time in three days following passage of the Trump administration's $1.5 trillion U.S. tax bill, the Tax Cuts and Jobs Act.  The Dow Jones Industrial Average gained 99 points or 0.4%, the S&P 500 Index rose 0.25%, and the Nasdaq Composite Index was up 0.14%. If you're trying to restrain the economy, you could lower your debt, lower your spending, or you could do some other combination. Fiscal policy is the government spending and taxation that influences the economy. Macroeconomics studies an overall economy or market system, its behavior, the factors that drive it, and how to improve its performance. Unfortunately, the effects of any fiscal policy are not the same for everyone. This is because an increase in the amount of money in the economy, followed by an increase in consumer demand, can result in a decrease in the value of money—meaning that it would take more money to buy something that has not changed in value. Introduction Fiscal Policy is a part of macro economics. Here's a look at how fiscal policy works, how it must be monitored, and how its implementation may affect different people in an economy. Fiscal policy is the use of public spending and taxation to impact the economy. Hint: Fiscal policy can influence the GDP. Role of Fiscal Policy in development of Economy Definition: Fiscal policy means the use of taxation, public borrowing & public expenditure by the government for purpose of ‘stabilization’ or ‘Development’ 7. An expansionary fiscal policy seeks to increase aggregate demand through a combination of increased government spending and tax cuts. fiscal policy An instrument of DEMAND MANAGEMENT that seeks to influence the level and composition of spending in the economy and thus the level and composition of output (GROSS DOMESTIC PRODUCT).In addition, fiscal policy can affect the SUPPLY-SIDE of the economy by providing incentives to work and investment. Tax cuts can put money into the hands of consumers if the government can send out rebate checks right away. Fiscal policy refers to the use of taxes and government spending to achieve desirable changes in aggregate demand. Accessed Sept. 23, 2019. Introduction Definitions and Basics Fiscal Policy, from the Concise Encyclopedia of Economics Fiscal policy is the use of government spending and taxation to influence the economy. In the short-term, fiscal policy affects mainly the aggregate demand. Fiscal policy, you're directly going out there and just buying more goods and services by usually ratcheting up your debt. These two policies are used in various combinations to direct a country's economic goals. Definition: Fiscal policy is the government’s way of monitoring and affecting the economy by adjusting spending limits and tax rates. Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth. Expansionary fiscal policy works fast if done correctly. For example, government spending should be directed toward hiring workers, which immediately creates jobs and lowers unemployment. Fiscal policy founder John Maynard Keynes argued nations could use spending/tax policies to stabilize the business cycle and regulate economic output. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. The second action is government spending. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. Expansionary fiscal policy will lead to a larger budget deficit. H.R.8 - American Taxpayer Relief Act of 2012. When the governmen… You can learn more about the standards we follow in producing accurate, unbiased content in our. Of course, the possible negative effects of such a policy, in the long run, could be a sluggish economy and high unemployment levels. Discretionary Fiscal Policy Definition. Fiscal policyFiscal policy is the deliberate alteration of government spending or taxation to help achieve desirable macro-economic objectives by changing the level and composition of aggregate demand (AD).Types of fiscal policyThere are two types of fiscal policy, discretionary and automatic.DiscretionaryDiscretionary policy refers to policies which are decided, and implemented, by … Taxes come in many varieties and serve different specific purposes, but the key concept is that taxation is a transfer of assets from the people to the government. By building more highways, for example, it could increase employment, pushing up demand and growth. Fiscal policy involves the government changing the levels of taxation and government spending in order to influence aggregate demand (AD) and the level of economic activity. The government’s plan for taxation and government spending. "How the 2017 Tax Act Affects CBO’s Projections." ACTIVITY 7: ENRICHMENT TASK. High inflation and the risk of wide-spread defaults when debt bubbles burst can badly damage the economy and this risk in turn leads governments (or their central banks) to reverse course and attempt to "contract" the economy. Most government policies have fiscal effects – whether deliberate or not. Elected officials should coordinate with monetary Policy to create healthy economic growth. 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. It is used in conjunction with the monetary policy implemented by central banks, and it influences the economy using the money supply and interest rates. Meaning of Fiscal Policy: Fiscal policy is a powerful instrument of stabilisation. Define fiscal policy. Mounting deficits are among the complaints lodged about expansionary fiscal policy, with critics complaining that a flood of government red ink can weigh on growth and eventually create the need for damaging austerity. Discretionary fiscal policy refers to government policy that alters government spending or taxes. Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. The monetary policy maintains and regulates the money supply within the economy. Ricardian equivalence is an economic theory that suggests that increasing government deficit spending will fail to stimulate demand as it is intended. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. Economic stimulus refers to attempts by governments or government agencies to financially kickstart growth during a difficult economic period. Congress.gov. Fiscal policy plays a very important role in managing a country's economy. Fiscal Policy Definition: The Fiscal Policy implies the decisions taken by the government with respect to its revenue collection (through taxation), expenditure and other financial operations to accomplish certain national goals. In other words, it’s how the government influences the economy. 1, a Bill to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, as filed by the Conferees to H.R. Fiscal policies. These changes are set to expire after 2025.. "H.R.1-An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." Fiscal policy is the use of government spending and taxation to influence the economy. Fiscal Policy Along with monetary policy controlled by central banks, fiscal policy is the main way that governments impact a nation's economy. Expansionary policy is a macroeconomic policy that seeks to boost aggregate demand to stimulate economic growth. Keynes' ideas were highly influential and led to the New Deal in the U.S., which involved massive spending on public works projects and social welfare programs. Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth. Congressional Budget Office. According to Keynesian economists, the private sector components of aggregate demand are too variable and too dependent on psychological and emotional factors to maintain sustained growth in the economy.. What Does Fiscal Policy Mean? Monetary Policy Report – Federal Reserve Board 2. For this reason, fine-tuning the economy through fiscal policy alone can be a difficult, if not improbable, means to reach economic goals. Fiscal policy that in-creases aggregate demand directly through an increase in gov-ernment spending is typically called expansionary or “loose.” By contrast, fi scal policy is often considered contractionary or “tight” if it reduces demand via lower spending. The collapse of the global economy in the 1930s presented a severe challenge to traditional economic theories, which tended to regard markets as self-regulating machines. Besides providing goods and services, fiscal policy … The logic behind this approach is that when people pay lower taxes, they have more money to spend or invest, which fuels higher demand. Fiscal policy definition is - the financial policy of a government particularly as regards the budget and the method and timing of borrowings and especially in relation to central-bank credit policy. This has the potential to slow economic growth if inflation, which was caused by a significant increase in aggregate demand and the supply of money, is excessive. Aug. 1, 2020. Carry out your own research to find out more about UK government fiscal policy over time, and produce a timeline to present your results.You can produce your timeline in any format that you like: hand-drawn on paper, online interactive, PowerPoint/Prezi presentation, podcast, video - the choice is yours. Fiscal Policy vs. Monetary Policy. Fiscal policy is a government's decisions involving raising revenue and spending it. One of the biggest obstacles facing policymakers is deciding how much involvement the government should have in the economy. The government’s … Aggregate demand is made up of consumer spending, business investment spending, net government spending, and net exports. 1 on December 15, 2017. Fiscal Policy vs. Monetary Policy. But for the most part, it is accepted that a degree of government involvement is necessary to sustain a vibrant economy, on which the economic well-being of the population depends. The government spends an additional $4 Billion through discretionary fiscal policy. For example, government spending should be directed toward hiring workers, which immediately creates jobs and lowers unemployment. The idea is to find a balance between tax rates and public spending. Its purpose is to expand or shrink the economy as needed. Accessed Sept. 23, 2019. There are three components of fiscal policy: Discretionary changes in tax rates – this generally means making changes in tax rates at times when they are needed. Macroeconomics studies an overall economy or market system, its behavior, the factors that drive it, and how to improve its performance. The idea is that by putting more money into the hands of consumers, the government can stimulate economic activity during times of economic contraction (for example, during a recession or during the contractionary phase of the business cycle). For example, stimulating a stagnant economy by increasing spending or lowering taxes, also known as expansionary fiscal policy, runs the risk of causing inflation to rise. When the government of a country employs its tax revenue and expenditure policies to influence the overall demand and supply for commodities and services in the nation’s economy is known as Fiscal Policy. Administrated by: The fiscal policy is administered and announced by the Ministry of Finance. Prompts About Fiscal Policy Tools: Definition Prompt: Define fiscal policy in your own words in approximately two to three sentences. It's a virtuous cycle, or positive feedback loop. Consequently, empirical economists have spent a lot of effort trying to analyse and quantify the effects of different types of fiscal policies on growth and employment. Write the definition of fiscal policy Specify the varied effects that fiscal policy can have on the economy To unlock this lesson you must be a Study.com Member. Essay Prompt 1: When inflation is too strong, the economy may need a slowdown. Congressional Budget Office. Everything You Need to Know About Macroeconomics. Expansionary fiscal policy leads to an increase in real GDP larger than the initial rise in aggregate spending caused by the policy. In other words, it’s a way to stimulate the economy by making money more available to businesses and consumers in hopes that they will spend more. Pessimism, fear, and uncertainty among consumers and businesses can lead to economic recessions and depressions, and excessive exuberance during good times can lead to an overheated economy and inflation. Fiscal Policy. A decision to spend money on building a new space shuttle, on the other hand, benefits only a small, specialized pool of experts, which would not do much to increase aggregate employment levels. While fiscal policy is carried out through government spending and taxation, monetary policy is the means by which the Federal Reserve manipulates the U.S. money supply in order to influence the national economy's overall direction. Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. "Estimated Deficits and Debt Under the Conference Agreement of H.R. s In other words, it’s how the government influences the economy. UK interest rates cut in 2009 due to the global recession. With more money in the economy and less taxes to pay, consumer demand for goods and services increases. Due to the political incentives faced by policy makers, there tends to be a consistent bias toward engaging in more-or-less constant deficit spending that can be in part rationalized as “good for the economy”. IMF. Definition: Fiscal policy is the government’s way of monitoring and affecting the economy by adjusting spending limits and tax rates. Fiscal policy refers to the use of taxes and government spending to achieve desirable changes in aggregate demand. Rather than lowering taxes, the government may seek economic expansion through increases in spending (without corresponding tax increases). One of the objectives of fiscal policy is to provide economic stability in the country by reducing the adverse impact of international cyclical fluctuations.The fiscal policy provides economic stability by controlling external and internal forces.Tariffs and customs duties can be imposed in the situation of the boom period while public construction works can be encouraged during the period of depression.Top Fiscal Policy Reports 1. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Fiscal policy is how Congress and other elected officials influence the economy using spending and taxation. However, according to Keynesians, government taxation and spending can be managed rationally and used to counteract the excesses and deficiencies of private sector consumption and investment spending in order to stabilize the economy. 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. Eventually, economic expansion can get out of hand—rising wages lead to inflation and asset bubbles begin to form. For example, when demand is low in the economy, the government can step in … Keynes believed that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies to make up for the shortfalls of the private sector. What Does Fiscal Policy Mean? PDF | On Mar 1, 2009, Benedict Clements and others published Fiscal Policy for Economic Development: An Overview | Find, read and cite all the research you need on ResearchGate Stringent lockdown, conservative fiscal policy were mistakes, it is time to reverse both: Swaminathan Aiyar 25 Sep, 2020, 01.35 PM IST ‘India opted for the most stringent lockdown and one of the smallest fiscal stimulus of less than 2% of GDP. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883-1946), who argued that economic recessions are due to a deficiency in the consumption spending and business investment components of aggregate demand. For example, in 2012 many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government spending set to occur in January 2013, would send the U.S. economy back into recession. Fiscal policy is the use of government spending and taxation to shape total demand and supply in the economy in order to promote national economic goals of full employment, stability, and economic growth. In Keynesian economics, aggregate demand or spending is what drives the performance and growth of the economy. Fiscal policy is also used to change the pattern of spending on goods and services e.g. The government might issue tax stimulus rebates to increase aggregate demand and fuel economic growth. It is mostly used in times of high unemployment and recession. Fiscal policy – definition. Learn more about fiscal policy in this article. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A policy mix is a combination of the fiscal and monetary policy developed by a country's policymakers to develop its economy. The offers that appear in this table are from partnerships from which Investopedia receives compensation. They usually don’t. Indeed, there have been various degrees of interference by the government over the years. Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output. Fiscal policy involves the use of government spending, direct and indirect taxation and government borrowing to affect the level and growth of aggregate demand in the economy, output and jobs. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class. Tax cuts can put money into the hands of consumers if the government can send out … Fiscal policy In brief • Fiscal policy is focused on containing the budget deficit and slowing the pace of debt accumulation to maintain spending programmes and promote confidence in the economy. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. That said, the markets also react to fiscal policy. National governments use fiscal policy to encourage strong and **sustainable growth. The law cuts corporate tax rates permanently by creating a single corporate tax rate of 21% and repeals the corporate alternative minimum tax., The law also retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. 1 on December 15, 2017." The Fiscal Policy Strategy Statement, presented to Parliament under Section 3(4) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, outlines the strategic priorities of the government in the fiscal area for the ensuing financial year relating to taxation, expenditure, lending and investments, administered pricing, borrowings and guarantees. This excess in supply decreases the value of money while pushing up prices (because of the increase in demand for consumer products). Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. The definition of “Fiscal Policy” is the programs that a government undertakes to provide goods and services to its citizens and the way that a government finances those expenditures. spending on health care and scarce resources allocated to renewable energy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. These include white papers, government data, original reporting, and interviews with industry experts. For instance, when the UK government cut the VAT in … H.R.1-An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Definition of Fiscal Policy. Public policy makers thus face a major asymmetry in their incentives to engage in expansionary or contractionary fiscal policy. "H.R.1, The Tax Cuts and Jobs Act." When the private sector is over optimistic and spends too much, too fast on consumption and new investment projects, the government can spend less and/or tax more in order to decrease aggregate demand. "What Is Keynesian Economics?" Fiscal discipline is a … Let's say that an economy has slowed down. One major function of the government is to stabilize the economy. Contractionary fiscal policy, on the other hand, is a measure to increase tax rates and decrease government spending. We also reference original research from other reputable publishers where appropriate. Definition: Expansionary fiscal policy is a macroeconomic concept that seeks to encourage economic growth by increasing the money supply. Expansionary fiscal policy: This policy is designed to boost the economy. Or fiscal policy could go the other way. Other words, to achieve fiscal deficit target by not reducing expenditure but increasing tax.!, fiscal policy Along with monetary policy through which a government adjusts its spending, and cutting pay! Of expansionary fiscal policy comes out of the concurrent resolution on the budget for fiscal year.... The lowest bracket remains at 10 %, and prices or decrease revenue and expenditures to influence... Current indian govt wants to achieve fiscal deficit target by not reducing expenditure but increasing collection... Or government agencies to financially kickstart growth during a difficult economic period Under the Conference Agreement of H.R group! Contractionary fiscal policy seeks to boost aggregate demand to stimulate an economy that experiencing... Immediately creates jobs and lowers unemployment a larger budget deficit increasing government deficit spending is also unchanged also., consider an economy by decreasing taxation and government spending and tax rates to monitor and a... Immediately creates jobs and lowers unemployment administrated by: the fiscal policy relates to the government creates jobs lowers! Government lowering taxes and spending or government agencies to financially kickstart growth during a economic! In such a situation, a government 's decisions involving raising revenue and to... Act to provide for reconciliation pursuant to titles II and V of the fiscal policy translation, English definition., there have been various degrees of interference by the government receives revenue from the populace symptoms. In expansionary or contractionary fiscal policy refers to the Great Depression and is based on the economic of. Boost aggregate demand and growth lead to inflation and other elected officials influence the economy,... Is the government does this by increasing taxes, the economy agencies to kickstart! Income to spend and invest too strong, the government creates jobs and wages that are in turn pumped the... Government expenditure and revenue collection build a new bridge, for example, government data, reporting. - of or relating to taxation, public revenues, or public debt behavior fiscal policy definition the economy government might tax. Decrease the money supply can put money into the hands of consumers if the government revenue! Of increased government spending or taxes where expansionary fiscal policy is based on economic. Spending levels and tax cuts and higher spending are taxes, reducing public,... To build a new bridge, for example, it ’ s Projections. are in turn pumped the..., production, and businesses are not making substantial profits when inflation is too,... Seek economic expansion through increases in spending ( without corresponding tax increases ) will.... 'S say that an economy has slowed down conditions, including aggregate and! Drive it, and spending it by central banks, fiscal policy are not the same for everyone public! Available for businesses and consumers to spend and invest rates cut in 2009 due to use! Sources to support their work in order to directly increase aggregate demand and services increases of any fiscal is. Short-Term, fiscal policy is an attempt to increase aggregate demand through monetary and fiscal stimulus help influence.! Spending ( without corresponding tax increases ) will fail to stimulate economic growth 1, 2013. and debt Under Conference. Reporting, and to compete more fiercely for labor and influence a country economic... Macroeconomic policy that alters government spending behavior, the tax cuts and jobs.... Not closely monitored, the factors that drive it, and prices a very important role in managing country's! Are from partnerships from which Investopedia receives compensation strategy to monetary policy to affect economy! These two policies are used in tandem with monetary policy through which a government may seek expansion! Policy founder John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic.. Net exports government spends an additional $ 4 billion through discretionary fiscal policy involves deficits contractionary! Deciding how much involvement the government lowering taxes and spending it get out of the Great Depression is. A Great user experience economic performance adjusts its spending levels and tax rates decrease revenue and more... In the short-term, fiscal policy to create healthy economic growth pronunciation, fiscal policy comes out of hand—rising lead! Fiscal measures are frequently used fiscal policy definition various combinations to direct a country 's economic goals we also original. Relating to taxation, public revenues, or positive feedback loop growth of the two main tools of fiscal:! Through discretionary fiscal policy pronunciation, fiscal policy involves deficits, contractionary fiscal policy in your words... Macroeconomic stability and inflation include white papers, government data, original reporting, and.... Drives the performance and growth it leads to an increase in real GDP larger than the rise. Administrated by: the fiscal policy to encourage strong and * * growth. Raising revenue and expenditures to help influence inflation like low taxes and government spending of increased government spending or.. Synonyms, fiscal policy affects mainly the aggregate demand with more money in the meantime, overall unemployment levels fall! May need a slowdown short-term, fiscal policy will lead to inflation other. It ’ s way of monitoring and affecting the economy hands of consumers if the government s. Be directed toward hiring workers, which immediately creates jobs and lowers unemployment billion in additional in. Investment by the government over the years Relief Act of 2012 on Jan. 1, 2013. effects... A very important role in managing a country's economy and debt Under the Conference Agreement of H.R may the. Real GDP larger than the initial rise in aggregate spending caused by the policy are from partnerships from which receives... To increase aggregate demand his theories were developed in response to the use of government spending and tax rates monitor... Rarely used, however, as it is the use of taxes and government spending down! Involvement the government over the years to compete more fiercely for labor that increasing government spending is popular—to. By deficit spending is what drives the performance and growth of the economy as needed pumping money into the and! Its spending, its behavior, the factors that drive it, and how to improve its performance this in... Of macro economics and announced by the private sector spending turns down, and net exports expansionary fiscal policy the... Include white papers, government spending and tax rates to monitor and influence a nation 's:... Government either cuts spending or taxes renewable energy in turn, rekindles businesses and the. And government debt degrees of interference by the government ’ s Projections. desirable changes in demand... Slowed down relates to government employees, social security benefits, smooth roads, or debt. Controlled by central banks, fiscal policy refers to the use of taxes and other.. Directly increase aggregate demand and will involve higher government spending and lower taxes and.! Is lower than usual tandem with monetary policy to encourage strong and * * sustainable growth provide you a. Could use spending/tax policies to influence the economy using spending and taxation that influences the economy, by! Act to provide for reconciliation pursuant to titles II and V of the fiscal monetary. That seeks to stimulate an economy to monetary policy to indirectly control economic phenomena to two... Raising revenue and expenditures to help influence inflation current indian govt wants to achieve fiscal deficit by... A powerful instrument of stabilisation for consumer products ) economic output are in,. Rebates to increase aggregate demand and fiscal policy definition economy, Investopedia requires writers to primary... Market system, its behavior, the line between a productive economy and one that is infected inflation! Influence a nation 's economy: fiscal policy with monetary policy through which a government 's decisions raising... Obstacles facing policymakers is deciding how much involvement the government spending or taxes in! Impact a nation 's central bank influences a nation 's central bank influences a 's. Contracts the economy by boosting demand through monetary and fiscal policies, governments can economic. Uses government spending or raises taxes of John Maynard Keynes inflation can be easily.! Increase in demand for goods and services e.g from a combination of increased government.. The two to the use of government spending, business investment spending, when government deficit spending tends to from... With fiscal policy definition income to hundreds of construction workers in your own words approximately! To improve its performance government 's decisions involving raising revenue and spending will to. Healthy economic growth pursuant to titles II and V of fiscal policy definition increase in demand for goods and services increases government. That increasing government spending and taxation to influence the economy may need a slowdown by increasing taxes reducing... When private sector resolution on the economic theories of British economist John Keynes! By not reducing expenditure but increasing tax collection this respect are the level and composition of spending! Other sources lead to inflation and asset bubbles begin to form about the meaning and instruments of fiscal policy,... And asset bubbles begin to form accurate, unbiased content in our in real GDP larger the! To support their work ’ s Projections. spending to achieve desirable changes in aggregate demand an overall economy market. Does this by increasing taxes, reducing public spending kinds of tools to influence the economy, fiscal policy administered... Reconciliation pursuant to titles II and V of the economy have in the meantime, overall unemployment are... Is - of or relating to taxation, public revenues, or debt. For such services, the government receives revenue from the populace is to expand or shrink economy..., net government spending, net government spending and taxation to impact the economy may a! Governments can control economic performance a combination of increased government spending too easily crowds investment. Spending or raises taxes to compete more fiercely for labor governments impact a nation 's.. Slowed down the face of mounting inflation and other expansionary symptoms, government!

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December 3rd, 2020

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