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Sweden is a constitutional monarchy. Its public finances have permitted special programmes and reforms to be...

Sweden is a constitutional monarchy. Its public finances have permitted special programmes and reforms to be carried out in order to promote economic growth. Fiscal Policy is used to influence the aggregate demand in the economy and the application of the type of Fiscal policy is based on the Global Economic situation. The Swedish government must apply suitable fiscal policy based on its economic condition. As a financial advisor to the government of Sweden, you are asked to suggest:

A. When ‘Expansionary Fiscal Policy’ can be used by the Swedish government? Discuss.

B. When ‘Contractionary Fiscal Policy’ can be used by the Swedish government? Discuss.

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Answer #1

a) Expansionary fiscal policy in the market is used when the demand in the market is low, and the economy is going through a recession. Expansionary fiscal policy will increase the demand by an increased government expenditure, and lower tax rates, This will help bringing the economy out of recession.

b) Contractionary fiscal policy will be used in the economy in case of inflationary output, this policy will increase the taxes, lower the government expenditure and shift the AD curve to the left, new equilibrium will be at a lower price and lower output.

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