fiscal policy 10

Expansionary and contractionary fiscal policy are ways of manipulating the economy. They are intended to smooth out the business cycle, encourage full employment, and reduce inflation thereby keeping GDP at a consistent growth.

Expansionary fiscal policy causes a rise in aggregate demand and drives output by lowering taxes and increasing government spending. Examples of this would be when the government ‘invested’ in the rebuilding of infrastructure (e.g. roads, bridges, etc.) to help pull us from the recession. Federal spending, especially via DoD, was used during several ‘slow downs’ to stimulate the tech sector and build some longer-term growth.

By contrast, contractionary fiscal policy decreases aggregate demand and lessens output by increasing taxes and reducing government spending. This is generally done to minimize or prevent inflation.

Both will smooth the cycle as stated but more importantly, these policies add predictability (prices and output) into the economy so businesses are able to plan for the future, driving long-term growth.

V/r,

Expansionary fiscal policy is tactic the federal government uses in order to potentially increase the supply of money in the economy. The government is able to accomplish this by implementing tax cuts or increasing government expenditures. The most common government expenditure which is expanded in order to increase the money supply is the military budget. Cutting taxes puts more money in the hands of business owners and in a round about way creates more jobs for companies who are in need and gives those who do have enough more purchasing power.

Contractionary fiscal policy basically the exact opposite expansionary fiscal policy. They are both tactics used by the federal government in an attempt to combat high unemployment rates and stimulate a healthy economy. The difference is that in a contractionary fiscal policy the government tries to accomplish this through increasing taxes or decreasing government expenditures. Increasing taxes takes money from the hands of consumers and is also used to help prevent inflation.

Expansionary fiscal policy is used more often than contractionary fiscal policy based solely on the needs presented by the economic climate.