Contractionary Fiscal Policy

Fiscal policy is defined by which a government adjusts its spending levels and tax rates to monitor and influence a nation 's economy. In the year of 1790 Alexander Hamilton had a vision to repair the United States economy problem he started his

First of all, expansionary fiscal policy is passed to expand the money supply of an economy to encourage economic prosperity, growth, and combat inflation. Inflation is described as the overall increase of prices in an economy or country. There are several ways an

A contractionary fiscal policy occurs when government spending is reduced either through from an increase in tax revenues or reduction in public spending and is used in periods in which it seeks slow the growth of aggregate demand. While an Expansionary Fiscal Policy implies an increase in public spending through increases in public spending or lower tax revenues. You can apply expansionary fiscal policies when seeking to increase aggregate demand.

The fiscal policy is one form of the expansionary policy, which comes in many form, In addition to transfer payments and rebates, the two major example of expansionary fiscal policy are increasing government spending and tax cuts. The goal of an expansionary fiscal policy is to improve the growth of the economy level of a country. Also to help the government reduce unemployment, and increase consumer demand and avoid an economic collapse.

The government has two tools of expansionary fiscal policy which are expansionary and contractionary. The difference in the two tools is that by taking the expansionary route the government is opting to stimulate the economy. Expansionary is most often the path taken during times of high unemployment or during a recession. The government cuts taxes, rebates as well as government spending. Lastly, another option the government may choose to take is called the contractionary fiscal policy this means that the government decides to decrease the amount of money such as increasing taxes and reduce the amount of money the government is spending.

Fiscal and monetary policies can lead to either higher or lower budget deficits depending on how the Federal Reserve Bank and government choose to spend the nation’s money. Fiscal policies are government policies concerning taxes and spending (Case, Fair & Oster, 2009, Pg. 95 and160). Fiscal policies may include making changes to things such as tax cuts or higher government spending, and could lead to a bigger budget deficit. For example, during a recession the government might borrow finances and invest it toward creating new jobs. This could ultimately help the future growth of the economy. “Looking at both markets simultaneously also reveals how fiscal policy affects the money market and how monetary policy affects the goods market” (Case, Fair & Oster, 2009, Pg. 219) Fiscal and monetary policies both have an affect on the economy.

Taxation, the amount of money we pay every year and of course the government is a big spender has a lot of assets at its disposal to influence the economy. The government is a very large entity and controls a lot of money. Fiscal policy is more effective when trying to stimulate the economic growth rather than trying to slow down an economy that is overheating. The goal of fiscal policy is too accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending. Fiscal policy pros are; it can build up the operation electronic stabilizers. Well-timed fiscal stabilization together with automatic stabilizers can have an impact on the level of aggregate expenditure and activity in the economy. Fiscal policy can be picky by attempting specific category of the economy. For example, the government can be focused to concentrate education, housing, health or any specific industry area. Fiscal policy controls a spending tap. Fiscal policy can have a forceful effect if used in bankruptcy, because the government can open a spending tap to increase the level of aggregate

Fiscal policy is often linked with Keynesianism (Michael Smith, Investpedia), which is derived from British economist John Maynard Keynes. Theories of Keynesianism have been used over time as they are popular and specifically applied to assuage economic downturns. The principle behind fiscal policy is influencing the level of aggregate demand in the economy to achieve economic factors of stabilizing the price, full employment and economic growth. Fiscal Policy is a government’s decision regarding spending and taxing. If a government wants to increase or restore growth in the economy, Spending rises. More items are purchased in spite of sticky prices, because of this the firm increases output.

Expansionary fiscal policy results in a reduction of taxes and increased government spending and therefore increasing the demand level in an economy. The institution of expansionary fiscal policy raises disposable income through reduction of taxes in the economy and this improves the rate of consumption. Therefore, tax reduction is an appropriate expansionary fiscal policy that can be deployed to help an economy that could be undergoing a recession (DeLong & Summers, 2012). Consequently, tax reduction could be a vital government tool for increasing the Gross Domestic Product. Low taxes encourage individuals to work hard and thus boosting the county’s GDP.

Fiscal policy is budgetary plan such as changes in government spending and taxation to attain a specific economic objective. The discretionary fiscal policy encompasses fine-tuning government spending and taxes with the explicit goal of affecting the economy towards the future full employment of the workforce, increasing growth of the economy, and control of inflation. Examples of discretionary spending:

Fiscal policies, if used efficiently, can be extremely effective and helpful to the economy. However, many pros and cons are tied to this method. Firstly, fiscal policies can be effective because they can focus spending to precise purposes.1 Therefore, the money that the government spends can be used on the things that would benefit the economy the most. Additionally, the government can reduce negative externalities with the use of taxes.1 An example of this would be taxing things that have a negative impact on the environment, such as companies producing an immense amount of pollution.1 Additionally, the government can also tax companies that are using too much of a limited resource.1 By doing this, the government not only can use the money gained from taxing to help the economy, but they would be reducing externalities such as these in order to help the country. Lastly, the effects of a fiscal period are much more immediate and quicker in comparison to a monetary policy,1 This means that the recessionary

During times of economic recession or uncertainty, the government can enact expansionary fiscal policy to either combat a decline in economic function, or in times of extreme and potentially harmful economic growth, they can instead enact contractionary fiscal policy to reduce economic expansion. Expansionary fiscal policy is used to effect the economy in periods of recession or economic decline, through decreasing the tax rates imposed on tax sources, and by also increasing government spending on constructive programs and outlays. As a portion of expansionary fiscal policy, decreasing tax rates allows the constituents of the economy to increase their profits and revenue as a smaller portion of their income would be paid into taxes. An increased profitability of businesses and increased income for workers results in greater discretionary consumer and business spending creating a higher demand for normal goods and services along with increased per capita production due to greater profitability of said goods, which is economic growth. Economic recession can also be fought through expansionary fiscal policy by increasing government spending of taxed funds on government outlays. When the government uses taxed funds to increase government spending more goods and

This policy involves increasing government spending and cutting taxes, in order to spur economic output. But if the government decides they need to do the opposite the government may adopt concretionary fiscal policy. This involves a reduction in government spending and an increase in taxes when faced with an overheating economy. But these actions, may have other effects in the economy. For instance, and expansionary fiscal policy may lead to the crowding out of investment.

Fiscal policy is related to macroeconomics because the taxation and spending of the government can have an effect on the economy. Understanding the effect that changes in policy have on the economy can be used as a tool by the government to alter the level of activity. So fiscal policy can be used to either speed up or slow down the economy based on the current needs and future outlook. This is significant to the success of the economy because it helps to control the wild fluctuations that happen as an economy develops. As economies progress, they go through business cycles of expansion and contraction. These cycles can vary greatly and the wild swings that are possible can be very bad for an economy. So fiscal policy can be applied to these cycles to smooth out the economy and guide it in the direction they need. The two approaches to how this can be done are known as expansionary and contractionary fiscal policy. According to our book (Miller, 278) expansionary policy is used when there is a recessionary gap and contractionary policy is used when there is an inflationary gap. Expansionary policy works by increasing government spending or cutting taxes which can increase aggregate demand and stimulate growth. Contractionary policy works by decreasing government spending or increasing

The type of fiscal policy that is being used in both the past and present day is expansionary fiscal policy. In this type of fiscal policy, taxes rate are reduced and the government spending increase. For example, in