Question

ECO/372T: Principles Of Macroeconomics Compare and contrast expansionary and contractionary fiscal policy. Which is more appropriate today? Explain your answer.

Answer 1

While the expansionary fiscal policy refers to the situation when the government increases its spending in the economy and brings down the taxes levied to encourage private organizations to increase their investments in various sectors. This leads to high economic growth and brings down unemployment in the economy.

The contractionary policy refers to the situation where the government reduces its spending and increases taxes. This leads to low capital availability for the business organizations and reduces the investment in various sectors of the economy. Due to this, employment also increases. This policy is usually undertaken to bring down a high inflation rate.

In the current scenario, most of the economies of the world are shrinking and inflation is on the rise. Therefore, a contractionary policy might be helpful to bring stability to the economy.