Question

Compare and contrast expansionary and contractionary fiscal policy.

Answer 1

Expansionary Fiscal Policy:

It refers to either increase in Government Spending or reduction in the tax rate to increase the Real GDP and move the economy out of recession.

It us used by the government when there is recessionary gap.

Due to this policy, both Real GDP and Price level increases.

The policy can lead to inflation.

Contractionary Fiscal Policy:

It refers to either decrease in Government Spending or increase in the tax rate to reduce the Real GDP and move the economy out of inflationary cycle.

It is used when there is inflationary gap.

Due to this policy, both Real GDP and Price level decreases.

There can be incraese in unemployment due to this policy