Answer to Question #131985 in Economics of Enterprise for zwelihle

Question

two types of fiscal policy

Answer 1

Firstly, fiscal policy is an economic policy in which a government uses taxation, government spending, and government borrowing to stimulate the level of economic activity and aggregate demand in an economy. Two types of fiscal policy are expansionary fiscal policy and deflationary fiscal policy.

Expansionary fiscal policy - a type of fiscal policy in which the government aims to stimulate economic activity. The government increases its spending (G) and reduces taxation (T) so as to increase aggregate demand (AD). It is also known as loose fiscal policy. The policy is mainly used during periods of recessions and high unemployment so as to stimulate the economy, increase GDP, and reduce unemployment.

Deflationary fiscal policy - a type of fiscal policy in which government reduces its spending (G) and increase taxation (T) - both direct and indirect taxes - to constrain the level of economic activity and aggregate demand (AD). It is also called tight fiscal policy. The policy is mainly used during periods of high inflation to contain inflationary pressure.