Answer to Question #88764 in Macroeconomics for BRENDA

Question

1. Explain the difference between an expansionary and contractionary fiscal policy. When, why, and how are they used? Which one is more effective than the other?

Answer 1

Contractionary Policy

Contractionary fiscal policy happens when the government and its public agencies lowers its expenditures, while also decreasing spending or increasing taxes at the same time. When a government reduces its spending and/or increases taxes, it leaves a lower amount of capital available for private business, thus causing a contraction of the economy and usually a degree of higher unemployment. This type policy is typically used to control the growth of inflation. 

Expansionary Policy

Expansionary fiscal policy is the flip side of this coin, in which the government raises spending and lowers taxes to boost economic growth. Reduced taxes help private enterprise to invest in major projects, employment, and physical expansion. In today's world, the most appropriate action is a contractionary policy. The global economy has recovered from the great recession of 2008 and it is important to prevent the same type of economic bubbles that occurred in the past. 

https://courses.lumenlearning.com/wm-macroeconomics/chapter/expansionary-and-contractionary-fiscal-policy/