Economics – Government and the macroeconomy - Fiscal policy | e-Consult

Expansionary fiscal policy is used to stimulate economic growth during a recession or period of low economic activity. It involves the government increasing either its spending or decreasing its taxes (or both). The aim is to boost aggregate demand and increase output and employment.

Contractionary fiscal policy is used to reduce inflation or slow down an overheated economy. It involves the government decreasing either its spending or increasing its taxes (or both). The aim is to reduce aggregate demand and curb inflationary pressures.

Example of Expansionary Fiscal Policy: During a recession, a government might increase spending on infrastructure projects (e.g., building roads and bridges) to create jobs and stimulate economic activity. Alternatively, they might cut income tax to give people more money to spend.

Example of Contractionary Fiscal Policy: If inflation is high, a government might increase income tax or cut spending on public services to reduce the amount of money circulating in the economy.