What is the difference between contractionary and expansionary fiscal policy?
Answer:
Expansionary fiscal policy means that the government is increasing government spending and reducing taxation in an attempt to increase the money available in the economy. Its purpose is to increase growth and reduce unemployment by increasing the demand for labour. The way this happens is that the government spends more thus demanding more labour for public works and teh public is taxed less which means tehy have more money to demand goods thus increasing demand for goods and as a result growth and demand for jobs. Its main drawback is that if teh government isnt careful it can lead to inflation.
Contractionary fiscal policy is when the government increases taxation and reduces government spending in an attempt to reduce money in the economy and as a result inflation. The reduced demand because the government wont demand and the people will have less money to do so will mean that prices will decline thus reducing inflation. Its main drawback is that it can lead to stunted growth and unemployment.
Expansionary policy is trying to jump start the economy. Generally cutting taxes or spending more and could mean a deficit.
Contractionary policy usually means the opposite. The economy is strong, and you can tax more or spend less and either pay off debts or build a surplus.
But the deficits and surplus at the end of the day doesn't always end up that way, politicians being politicians.
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