![]() ![]() This is because lawmakers campaign on the promise of government spending and lowering their constituents’ taxes. Notably, democracy tends to lead to expansionary discretionary fiscal policy. The Greek government-debt crisis, beginning in 2009 and lasting roughly a decade, as a result of this issue. This is because the government is effectively spending more than it ends up receiving in taxes. The drawback of expansionary fiscal policy is that it can lead to budget deficits. Tax cuts are less effective in creating jobs, as the tax rate must already be high for lowering taxes to do so ( the Laffer Curve is the economic theory describing this principle). Among the best stimuli for the economy are unemployment benefits, proven empirically via economic studies. Along with tax cuts, growth is especially accelerated. With more jobs, the overall populace has more funds to spend, leading to higher levels of demand. However, it can also lead to inflation because of the higher demand within the economy.Įxpansionary fiscal policy creates jobs, and is executed via contractors (indirectly) or public workers programs (directly). This should also create an increase in aggregate demand and could lead to higher economic growth. 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. ![]()
0 Comments
Leave a Reply. |