Expansionary and Contractionary Fiscal Policy

Fiscal policy refers to the use of budgeting tools by the government to influence a nation’s economy. Under the discretionary fiscal policy, the government utilizes expansionary and contractionary measures to stimulate or slow down the economy. Whereas the expansionary fiscal policy aims to increases boost the economy, the contractionary fiscal policy seeks to depress the economy.

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The government uses expansionary fiscal policy by cutting or increasing government spending. As per Coppock and Mateer (2017), these measures have the effect of expanding money supply in the economy by providing businesses and consumers with more money to spend. Over time, the expansionary fiscal policy increases the aggregate demand and, as a result, boost the economy (Auerbach, 2019). Therefore, the purpose of expansionary fiscal policy entails boosting economic growth to a healthy level.

On the other hand, a contractionary fiscal policy involves a reduction in government spending or tax rates increase. Auerbach (2019) elucidates that these strategies shrink money supply in the economy; thus, reducing the amount of money available for consumers and businesses to spend. Consequently, contractionary fiscal policy slows down the economy by decreasing aggregate demand (Coppock & Mateer, 2017). Thus, the purpose of contractionary fiscal policy is to slow the growth of an economy to a healthy level

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Hence, whereas both expansionary and contractionary fiscal policy utilizes budgeting instruments to influence economic growth, they have opposite effects. The former saim to boost economic growth rate while the latter seeks to slow down the growth. Both achieve their purpose by regulating the supply of money in the economy. It is also worth noting that the common goal of both strategies is to maintain an economy’s growth at a healthy level.

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