Question

12. What is the purpose of the following fiscal policies? a. Contractionary fiscal policy b. Expansionary fiscal policy T1 Wighod to hiftorante demand to the right

Answer 1

(a) Contractionary fiscal policy refers to government spending cuts or tax increases in order to contract the economy i.e. reduce the amount of money available in circulation.

The main purpose of a contractionary fiscal policy is to slow growth to a healthy economic level i.e. prevent the economy from inflation, asset price bubbles, as well as unsustainable business cycles, which are all a consequence of above-normal growth levels on the economy

(b) On the other hand, an expansionary fiscal policy leads to an increase in money supply in the economy, by either an increase in government spending or a fall in taxes or a combination of two.

This is done in order to boost growth in an economy. This is normally needed during the contractionary phase of the business cycle. The government wants to reduce unemployment, increase consumer demand, and avoid a recession. If a recession has already occurred, then it seeks to end the recession and prevent depression.

An expansionary fiscal policy puts more money in the hands of the consumers, which increases their purchasing power. This results in an increase in demand, an increase in production and a resultant increase in employment.