![]() ![]() A decrease in taxation will lead to people having more money and consuming more. This kind of policy involves decreasing taxes and/or increasing government spending.Īn expansionary discretionary fiscal policy is typically used during a recession. Since, Aggregate Demand = Consumption + Investment + Government Spending + Net Exports, an expansionary policy will shift aggregate demand to the right. ![]() With this decreased demand, then, the economy’s growth is slowed. With fewer jobs, and higher taxes, both families and businesses are left with less income available for spending. A reduction of the deficit from $200 billion to $100 billion is said to be a contractionary fiscal policy, even though the budget is still in a deficit.Ĭontractionary fiscal policy slows growth, which includes job growth. The focus is not on the level of the deficit, but on the change in the deficit. the government budget is in surplus) and loose or expansionary when spending is higher than revenue (i.e. This policy will shift aggregate demand to the left (this denotes a decrease).Ī fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e. ![]() A contractionary discretionary policy will lower government spending and/or increase taxation. When an economy is in a state in which growth is getting out of control and therefore causing inflation and asset price bubbles, a contractionary fiscal policy can be used to rein in this inflation-to bring it to a more sustainable level. Similar Posts: Contractionary Discretionary Fiscal Policy This will lead them to intentionally increase public works spending schemes as well. However, the government may find these automatic stabilizers to be inadequate to deal with major issues, imbalances, and instabilities in the economy. These automatic stabilizers take place when, during a recession, a government automatically spends more because the economy forces more people to claim unemployment benefits. This measure would help to close the deflationary gap.ĭiscretionary fiscal policy is a demand-side policy that uses government spending and taxation policy to influence aggregate demand.ĭiscretionary fiscal policy differs from automatic fiscal stabilizers. The output is determined by the level of aggregate demand (AD), so a discretionary fiscal policy can be used to increase aggregate demand and thus also increase the output. For instance, when the UK government cut the VAT in 2009, this was intended to produce a boost in spending. Its purpose is to expand or shrink the economy as needed. Discretionary fiscal policy refers to government policy that alters government spending or taxes. ![]()
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