Economics
Expansionary and Contractionary Fiscal Policy
Expansionary fiscal policy involves increasing government spending and/or reducing taxes to stimulate economic growth and boost aggregate demand. On the other hand, contractionary fiscal policy involves decreasing government spending and/or increasing taxes to slow down an overheated economy and reduce inflationary pressures. These policies are used by governments to manage the overall level of economic activity.
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11 Key excerpts on "Expansionary and Contractionary Fiscal Policy"
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
30.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP. 30.5 Automatic Stabilizers Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. The standardized employment budget is the calculation of what the budget deficit or budget surplus would have been in a given year if the economy had been producing at its potential GDP in that year. Many economists and politicians criticize the use of fiscal policy for a variety of reasons, including concerns over time lags, the impact on interest rates, and the inherently political nature of fiscal policy. We cover the critique of fiscal policy in the next module. 30.6 Practical Problems with Discretionary Fiscal Policy Because fiscal policy affects the quantity of money that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. If an expansionary fiscal policy also causes higher interest rates, then firms and households are discouraged from borrowing and spending, reducing aggregate demand in a situation called crowding out.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
17.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP. 17.5 Automatic Stabilizers Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. The standardized employment budget is the calculation of what the budget deficit or budget surplus would have been in a given year if the economy had been producing at its potential GDP in that year. Many economists and politicians criticize the use of fiscal policy for a variety of reasons, including concerns over time lags, the impact on interest rates, and the inherently political nature of fiscal policy. We cover the critique of fiscal policy in the next module. 17.6 Practical Problems with Discretionary Fiscal Policy Because fiscal policy affects the quantity of money that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. If an expansionary fiscal policy also causes higher interest rates, then firms and households are discouraged from borrowing and spending, reducing aggregate demand in a situation called crowding out.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
16.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP. 16.5 Automatic Stabilizers Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. The standardized employment budget is the calculation of what the budget deficit or budget surplus would have been in a given year if the economy had been producing at its potential GDP in that year. Many economists and politicians criticize the use of fiscal policy for a variety of reasons, including concerns over time lags, the impact on interest rates, and the inherently political nature of fiscal policy. We cover the critique of fiscal policy in the next module. 16.6 Practical Problems with Discretionary Fiscal Policy Because fiscal policy affects the quantity of money that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. If an expansionary fiscal policy also causes higher interest rates, then firms and households are discouraged from borrowing and spending, reducing aggregate demand in a situation called crowding out.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 9 Fiscal Policy & Monetary Policy Fiscal Policy In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: • Aggregate demand and the level of economic activity; • The pattern of resource allocation; • The distribution of income. Fiscal policy refers to the use of the government budget to influence the first of these: economic activity. Stances of fiscal policy The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows: • A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. • An expansionary stance of fiscal policy involves government spending exceeding tax revenue. • A contractionary fiscal policy occurs when government spending is lower than tax revenue. ____________________ WORLD TECHNOLOGIES ____________________ However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Increasing net taxes or reducing government purchases also reduces a government deficit or increases a surplus. So a contractionary fiscal policy could reduce inflation and reduce a federal deficit. Note that a contraction- ary fiscal policy aims to close an expansionary gap. Such precisely calculated expansionary and contractionary fiscal policies are difficult to achieve. Their proper execution assumes that (1) potential output is accurately gauged, (2) the relevant spending multiplier can be predicted accurately, (3) aggregate expansionary fiscal policy An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap contractionary fiscal policy A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 11 Fiscal Policy 237 EXHIBIT 2 Discretionary Fiscal Policy to Close an Expansionary Gap The aggregate demand curve AD’ and the short-run aggregate supply curve, SRAS 110 , intersect at point e’, resulting in an expansionary gap of $0.5 trillion. Discretionary fiscal policy aimed at reducing aggregate demand by just the right amount could close this gap without inflation.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Increasing net taxes or reducing government purchases also reduces a government deficit or increases a surplus. So a contractionary fiscal policy could reduce inflation and reduce a federal deficit. Note that a contraction- ary fiscal policy aims to close an expansionary gap. Such precisely calculated expansionary and contractionary fiscal policies are difficult to achieve. Their proper execution assumes that (1) potential output is accurately gauged, (2) the relevant spending multiplier can be predicted accurately, (3) aggregate expansionary fiscal policy An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap contractionary fiscal policy A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 25 Fiscal Policy 569 EXHIBIT 2 Discretionary Fiscal Policy to Close an Expansionary Gap The aggregate demand curve AD’ and the short-run aggregate supply curve, SRAS 110 , intersect at point e’, resulting in an expansionary gap of $0.5 trillion. Discretionary fiscal policy aimed at reducing aggregate demand by just the right amount could close this gap without inflation.
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
Contractionary policy. This is applied to check inflation, which has been defined by Hugh Dalton (a chancellor of the exchequer) in the now famous phrase, Too much money, chasing too few goods'. Fiscal and monetary measures need, therefore, to reduce the amount of money in circulation or to increase the supply of goods to restore the equilibrium. Towards this end a government will budget for a surplus that will require the following measures: Budget (Surplus) Revenue side Expenditure side increase (i) direct taxation decrease (i) current government expenditure on (ii) indirect taxation goods and services (iii) national insurance (ii) transfer payment contributions (iii) capital expenditure investment At the same time, measures are needed to encourage industry to increase the supply of goods and services by means of grants and tax allowances that would result in investment, leading to greater competitiveness and produc-tive capacity. The problem is that grants increase public expenditure, and allowances reduce tax revenue. Higher personal tax may produce a disin-centive to work (see p. 102). Higher tax on profits reduces the incentive to increase the supply of goods and services and the ability to finance new investment out of a company's own resources. Both Expansionary and Contractionary Fiscal Policy may have to be rein-forced by monetary measures. 242 Public Sector Economies In economic jargon stagflation refers to a situation when stagnation and inflation exist at the same time—as occurred in the 1970s and early 1980s. It is characterised by unemployment and rising prices occurring simultaneously. Expansionary policies that help to reduce unemployment, increase inflation. Contractionary policies that reduce inflation, increase unemployment.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
An increase in the budget deficit is always expansionary. B. An increase in government spending is always expansionary. C. The structural deficit is always larger than the deficit below full employment. 5. Crowding out refers to: A. a fall in interest rates that reduces private investment. B. a rise in private investment that reduces private consumption. C. a rise in government borrowing that reduces the ability of the private sector to access investment funds. 6. A contractionary fiscal policy will always involve which of the following? A. A balanced budget B. A reduction in government spending C. A fall in the budget deficit or rise in the surplus 7. Which one of the following statements is most accurate? A. Ricardian equivalence refers to individuals having no idea of future tax liabilities. B. If there is high unemployment in an economy, then easy monetary and fiscal policies should lead to an expansion in aggregate demand. C. Governments do not allow political pressures to influence fiscal policies but do allow voters to affect monetary policies. Solution to 1: B is correct. Economic forecasts from models will always have an element of uncertainty attached to them and thus are not unambiguous or precise in their prescriptions. Once a fiscal policy decision has been made and implemented, unfore- seen changes in other variables may affect the economy in ways that would lead to Chapter 7 Monetary and Fiscal Policy 391 4. THE RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICY Both monetary and fiscal policies can be used to try to influence the macroeconomy. But the impact of monetary policy on aggregate demand may differ depending on the fiscal policy stance. Conversely, the impact of fiscal policy might vary under various alternative monetary policy conditions. Clearly, policy makers need to understand this interaction.
eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Scott Applewhite; bottom middle, AP Images/Rick Bowmer; bot- tom right, Pool/Getty Images News/Getty Images Summary 1. The government’s fiscal policy is its plan for managing aggregate demand through its spending and taxing pro- grams. This policy is made jointly by the president and Congress. 2. Because consumer spending (C) depends on disposable income (DI), and DI is GDP minus taxes, any change in taxes will shift the consumption schedule on a 458 line diagram. Such shifts in the consumption schedule have multiplier effects on GDP. 3. The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases because each $1 of tax cuts leads to less than $1 of increased con- sumer spending. 4. An income tax reduces the size of the multiplier. 5. Because an income tax reduces the multiplier, it reduces the economy’s sensitivity to shocks. It is, therefore, con- sidered an automatic stabilizer. 6. Government transfer payments are like negative taxes, rather than like government purchases of goods and ser- vices, because they influence total spending only indi- rectly through their effect on consumption. 7. If multipliers were known precisely, it would be possi- ble to plan a variety of fiscal policies to eliminate either a recessionary gap or an inflationary gap. Recessionary gaps can be cured by raising G or cutting T. Inflationary gaps can be cured by cutting G or raising T. 8. Active stabilization policy can be carried out either by means that tend to expand the size of government (by raising either G or T when appropriate) or by means that reduce the size of government (by reducing either G or T when appropriate). 9. Expansionary fiscal policy can mitigate recessions, but it also raises the budget deficit. 10. Expansionary fiscal policy also normally exacts a cost in terms of higher inflation. This last dilemma has led to a great deal of interest in “supply-side” tax cuts designed to stimulate aggregate supply.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Clinton’s 1992 campaign made economic growth a focus of its attacks on Bush, and his 1996 campaign emphasized the strength of the economy. In 1996, a healthy economy helped Clinton defeat Bob Dole. And in the election of 2004, supporters of George W. Bush made economic growth a major focal point of their campaign against John Kerry. More recently, Barack Obama’s successful campaign for president had economic issues as a leading concern with the U.S. recession beginning in 2008. This was more than just campaign rhetoric, however. By law the government is responsible for the macroeconomic health of the nation. The Employment Act of 1946 states: It is the continuing policy and responsibility of the Federal Government to use all practical means consistent with its needs and obligations and other essential consid-erations of national policy to coordinate and utilize all its plans, functions, and resour-ces for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare conditions under which there will be afforded useful employment opportunities, including self-employment for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power. Fiscal policy is one tool that government uses to guide the economy along an expansionary path. In this chapter, we examine the role of fiscal policy—government spending and taxation—in determining the equilibrium level of income. Then we review the budget process and the history of fiscal policy in the United States. Finally, we describe the difference in fiscal policy between industrial and developing countries. Fiscal policy includes government spending on the provision of goods and services as well as infrastructure. In this photo, workers create mud bricks in the desert. The bricks will be used in infrastructure construction projects. Such activities are often provided by government and funded by taxpayers.
eBook - PDFTest Bank for Introductory Economics
And Introductory Macroeconomics and Introductory Microeconomics
- John G. Marcis, Michael Veseth(Authors)
- 2014(Publication Date)
- Academic Press(Publisher)
MONETARY VERSUS FISCAL POLICY 1 1 Roman set numbers in parentheses refer to pages where the material is discussed in both Introductory Economics, and Introductory Macroeconomics. 1. Which of the following is not a first-order impact of an expansionary monetary policy? (266) a. Increased investment spending. b. Increased aggregate demand. c. Decreased interest rate. D. Increased aggregate supply. e. Increased real gross national product. 2. Which of the following is not a second-order impact of an expansionary fiscal policy? (267) A. Increased taxes. b. Increased interest rates. c. Decreased investment spending. d. Decreased real gross national product. e. Increased demand for credit. 3. Investment tax credits are a tool of fiscal policy which are designed to have the same impact upon the economy as: (269-270) a. a reduction in personal income taxes. b. an increase in federal deficit spending. c. an increase in the rate of inflation. D. a reduction in the rate of interest. e. an increase in the demand for credit. 4. According to Veseth, the presence of a variable lag in monetary policy is dangerous because: (270-271) a. it is difficult to predict what the fiscal reaction will be. b. the size of the money multiplier cannot be predicted. c. it is difficult to predict when interest rates will change. d. the lag between investment spending and changes in aggregate demand is unstable. E. it is difficult to predict when investment spending will change. 5. Contractionary monetary policy and contrac-tionary fiscal policies are similar in their impacts upon: (272-273) a. the supply of credit. b. investment spending. C. aggregate demand. d. interest rates. e. aggregate supply. 6. Assume that the supply of credit is fixed (that is, it does not change with changes in interest rates). An increase in governmental spending in this situation which is financed by borrowing from the public results in: (275-276, Fig. 11-6) a.
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