Difference between Contractionary and Expansionary Fiscal Policy

Contractionary and expansionary fiscal policies involve governments adjusting spending and taxation to influence economic growth and control inflation. Explore the differences between these policies on employment here

What is Contractionary Fiscal Policy

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Features of Contractionary Fiscal Policy

• Decreased Government Spending: The government reduces its spending on public projects and services to decrease overall economic activity.
• Higher Taxes: Increasing tax rates takes more money from individuals and businesses, which can reduce spending and investment.
• Lower Transfer Payments: Reducing benefits like unemployment assistance or social security lowers the money people receive, decreasing their spending power.
• Reduced Aggregate Demand: With less government spending and higher taxes, overall economic demand decreases.

What is Expansionary Fiscal Policy

Features of Expansionary Fiscal Policy

• Increased Government Spending : The government raises its expenditures on public projects and services to stimulate economic activity and create jobs.
• Lower Tax Rates : Reducing tax rates allows individuals and businesses to keep more of their income, which can boost consumer spending and investment.
• Higher Transfer Payments : Increasing benefits such as unemployment insurance, social security, or subsidies puts more money in the hands of citizens, thereby increasing their purchasing power.
• Boosted Aggregate Demand : The combined effect of higher government spending and reduced taxes enhances overall economic demand.

Difference between Contractionary and Expansionary Fiscal Policy

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