Question

Are contractionary and expansionary fiscal policies economic or political or both? Explain. What is discretionary fiscal policy? Under what economic circumstances are expansionary and contractionary policies best used?

Answer 1

If we look at fiscal policies, it is completely driven by case to case basis for example India had adopted fiscal policy at expansionary rate in 1998-2002 when growth was subdued and hence to increase national income, public savings and private savings the government had decreased taxes on various products and corporates and 5th pay commision was introduced to given hike in wages. this resulted an increase in GDP if we look at the above policy it was from economic view point , however , since lok sabha elections were due in 2003-2004 the government had taken this moves as political ambition to regain control of next regime by satisfying the populations and needs and demands. Hence , its both political and economic.

A discretionary fiscal policy is either expansionary or contractionary. Here , the government changes either spending or taxes to expand or shrink economy as needed. output is determined by aggregate demand and hence its demand side policy which influences aggregate demand.

expansionary policy is best used when the growth is flat and has not been increasing over years or when there is recession. here generally government reduces taxes or increases spending. While contractionary policy is used when economy is growing faster superlative rate which on verge of hyperinflation. Here, government decreases spending or increases taxes.