Define fiscal policy. What are the federal government’s three options for conducting expansionary and contractionary fiscal...

Define fiscal policy. What are the federal government’s three options for conducting expansionary and contractionary fiscal policy? Compare and contrast in detail the effect of expansionary and contractionary fiscal policy on aggregate demand. Draw a graph to illustrate the likely effects.

Solutions

Expert Solution

Fiscal policy is a policy used by government to influence the money supply in the economy. It is a means by which government adjusts its spending levels, transfer payments and monitor tax rates to influence the economy.

The federal government's three options for conducting fiscal policy are :

Government spending / Government Expenditure
Tax rates
Transfer payments

Expansionary fiscal policy : This leads to a decrease in government spending or Increase in tax revenue or a decrease in the transfer payments or a mix of them.

Under the expansionary fiscal policy, the AD curve shifts upwards, showing an increase in the income, employment and output in the economy.

The figure shows LRAS (long run aggregate supply curve ) , SRAS (short run aggregate supply curve) , Aggregate demand (AD). Due to the expansionary fiscal policy, the AD shifts from AD to AD'. The equilibrium shifts from E to E' and the prices increase from P to P'. So, the new level of output in the economy is Y.

Contractionary Fiscal Policy :

This leads to an increase in government spending or a decrease in tax revenue or an increase in the transfer payments or a mix of them.

Under the contractionary fiscal policy, the AD curve shifts downwards, showing a decrease in the income, employment and output in the economy.

The figure shows LRAS (long run aggregate supply curve ) , SRAS (short run aggregate supply curve) , Aggregate demand (AD). Due to the contractionary fiscal policy, the AD shifts from AD to AD'. The equilibrium shifts from E to E' and the prices increase from P to P'. So, the new level of output in the economy is Y.

Rahul Sunny answered 11 months ago

Next > < Previous

Related Solutions

Is the current policy of the Federal Reserve “expansionary” or “contractionary”? What variables will the FOMC...

Is the current policy of the Federal Reserve “expansionary” or “contractionary”? What variables will the FOMC look at in determining the timing and size of future adjustments to monetary policy? Explain your answer

Explain thoroughly when an expansionary fiscal policy is appropriate and when a contractionary fiscal policy is...

Explain thoroughly when an expansionary fiscal policy is appropriate and when a contractionary fiscal policy is appropriate. Explain the three fiscal policies that can be used in expansionary fiscal policy. Each policy must come with an example. Explain the three fiscal policies that can be used in contractionary fiscal policy. Each policy must come with an example. Please leave any websites you use thanks! :)

a) Define what are expansionary and contractionary discretionary fiscal policies. b) Define what is automatic stabiliser...

a) Define what are expansionary and contractionary discretionary fiscal policies. b) Define what is automatic stabiliser in fiscal policy and provide 2 examples. c) Consider an economy that is operating below the full-employment level of GDP, what would be the effect of an increase in government spending on agreegated demand and real GDP.

Identify each of the following as expansionary or contractionary fiscal policy (or neither) and show their...

Identify each of the following as expansionary or contractionary fiscal policy (or neither) and show their effect on the ADAS model. a. The corporate income tax rate is increased b. Defense spending is increased c. The Federal Reserve lowers the target for the federal funds rate d. Families are allowed to deduct all their expenses for day care from their federal income taxes e. The individual income tax rate is decreased

Explain the differences between an Expansionary and Contractionary fiscal policy. When would each be used? What...

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?

define expansionary fiscal policy and explain: (1) when the government uses expansionary fiscal policy, (2) its...

define expansionary fiscal policy and explain: (1) when the government uses expansionary fiscal policy, (2) its possible negative impacts (3) why it doesn't always work as intended, and (4) why it sometimes can be destabilizing for the economy.

Define and contrast contractionary monetary policy and expansionary monetary policy and their respective economic outcomes (include...

Define and contrast contractionary monetary policy and expansionary monetary policy and their respective economic outcomes (include changes in equilibrium interest rates). Explain what happens if the affects of either of these policies goes too far.

Define and contrast contractionary monetary policy and expansionary monetary policy and their respective economic outcomes (include...

Suppose the Federal Reserve is conducting contractionary monetary policy using open market operations. a.) What is...

Suppose the Federal Reserve is conducting contractionary monetary policy using open market operations. a.) What is happening to the money supply? b.) What is happening to the federal funds rates? c.) Would the Federal Reserve be buying or selling treasury bills? d.) What are the two main policy goals of the Federal Reserve and for which policy goal is contractionary monetary policy best used?

Are contractionary and expansionary fiscal policies economic or political or both? Explain. What is discretionary fiscal...

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?

Subjects