There are two main types of fiscal policy: expansionary and contractionary. Expansionary fiscal policy, designed to stimulate the economy, is most often used during a recession, times of high unemployment or other low periods of the business cycle. It entails the government spending more money, lowering taxes, or both.
Similarly, it is asked, what would be an example of a contractionary fiscal policy?
Examples of this include lowering taxes and raising government spending. When the government uses fiscal policy to decrease the amount of money available to the populace, this is called contractionary fiscal policy. Examples of this include increasing taxes and lowering government spending.
What is contractionary fiscal policy and why is it used?
Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing government expenditures or both in order to fight inflationary pressures. Due to an increase in taxes, households have less disposal income to spend. Lower disposal income decreases consumption.
What is the definition of contractionary fiscal policy?
The word 'fiscal' refers to the government's budget, which includes government spending, taxes and transfer payments like welfare or social security. Fiscal authorities use contractionary fiscal policy to slow down the economy, which offsets - or reverses - an inflation problem.