Question

Explain the differences between an Expansionary and Contractionary fiscal policy.

When would each be used?

What would be done in each circumstance?

What would be the results?

Answer 1

The expansionary fiscal policy is the situation when the government reduce the taxes and increase the expenditure in the economy. Contractionary fiscal policy, on the other hand, is the fiscal policy where the government increase the taxes and decrease the expenditure in form of government procurement.

An expansionary fiscal policy is used at the time when there is a decline in the economic activity in the country. The expansionary policy allows the increase the demand and brings the economy back to the higher output level. The contractionary fiscal policy is used at the time when the demand is high i.e. the economy is going through inflation and there is more demand in the economy which the economy can't fulfill.

Expansionary policy: Decrease the tax rates and increase the government expenditure.

Contractionary fiscal policy: Increase the tax rate and decrease the government expenditure.

By using the expansionary policy the government increases the demand in the economy and by using the contractionary policy the government decreases the output and demand in the economy.