Question

Discuss the primary goals of expansionary and contractionary fiscal policies and their effects on unemployment rates, inflation rates, interest rates, private investment, and GDP.

Answer 1

The fiscal policy is used by the government to produce the desired impacts and maintain the economic health of the country.

The expansionary fiscal policy is used by the government when the economy is below the full employment level. the expenditure and taxes are maneuvered in such way that aggregate demand rises and it drives up the output level. the price and rate of interest also might rise when the government goes for the expansionary fiscal policy. it encourages the private investment as the expected profit rises.

further, the contractionary fiscal policy is followed when the economy is booming or above the full potential level. Here the government reduces the expenditure and raises the level of taxes. Thus it reduces the AD and output or GDP and employment come to the full potential level. The inflation and rate of interest will decline when dear fiscal policy is pursued by the government. Private investment is discouraged.