Question

Use mathematical formula (G, T, ↑, ↓) ONLY; to define the discretionary, contractionary fiscal policy

Answer 1

Expansionary (or loose) fiscal policy( G↑, T↓)

This involves increasing AD.

Therefore the government will increase spending (G) and cut taxes (T). Lower taxes will increase consumers spending because they have more disposable income (C)

This will tend to worsen the government budget deficit, and the government will need to increase borrowing.

Discretionary (or tight) fiscal policy ( T↑, G↓)

This involves decreasing AD.

Therefore the government will cut government spending (G) and/or increase taxes (T). Higher taxes will reduce consumer spending (C)

Tight fiscal policy will tend to cause an improvement in the government budget deficit.

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