Chapter 17: Problem 29

What is the difference between expansionary fiscal policy and contractionary fiscal policy?

Short Answer

Expert verified

The difference between expansionary and contractionary fiscal policy lies in their objectives and methods. Expansionary fiscal policy aims to stimulate economic growth and increase demand through increased government spending, lower taxes, or both. In contrast, contractionary fiscal policy seeks to control inflation, reduce budget deficits, and stabilize the economy by reducing government spending, raising taxes, or both. Examples of expansionary measures include infrastructure projects and tax cuts, while contractionary measures may involve austerity measures and tax increases.

Step by step solution

Define Expansionary Fiscal Policy

Expansionary fiscal policy refers to government measures aimed at increasing economic activity, usually to fight recession or to boost growth. This can be achieved through increased government spending, lower taxes, or a combination of both. The primary goal of expansionary fiscal policy is to stimulate demand, create jobs, and ultimately increase the overall level of economic output.

Define Contractionary Fiscal Policy

Contractionary fiscal policy, on the other hand, is when the government takes actions to reduce economic activity in order to control inflation or reduce budget deficits. This may involve reducing government spending, raising taxes, or a mix of both. The primary objective of contractionary fiscal policy is to decrease demand, slow down economic growth, and stabilize inflation.

Objectives of Expansionary and Contractionary Fiscal Policy

The main objective of expansionary fiscal policy is to stimulate economic growth, create employment opportunities, and increase disposable income for households and businesses. Conversely, the goal of contractionary fiscal policy is to help control inflation, reduce public debt, and ensure the long-term stability of the economy by maintaining a balanced budget.

Examples of Expansionary Fiscal Policy

Some examples of expansionary fiscal policy measures include: 1. Increased government spending on infrastructure projects, such as roads, bridges, and public transportation. 2. Boosting public funding for education, healthcare, and social welfare programs. 3. Offering tax cuts or tax incentives to households and businesses to encourage increased consumption and investment.

Examples of Contractionary Fiscal Policy

Some examples of contractionary fiscal policy measures include: 1. Reducing government spending on non-essential projects and services. 2. Implementing austerity measures to lower budget deficits and public debt. 3. Raising taxes on personal income, corporate profits, and/or goods and services to decrease consumer and business spending. In summary, the difference between expansionary and contractionary fiscal policy lies in their objectives and the methods used to achieve those objectives. Expansionary policies are designed to stimulate economic growth, while contractionary policies are aimed at controlling inflation and promoting long-term economic stability.