How do expansionary fiscal policy and contractionary fiscal...

Key Concepts

Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence a nation’s economy, including its aggregate demand, employment levels, and inflation. It serves as a tool for stabilizing the economy through different measures based on prevailing economic conditions.

Expansionary Fiscal Policy

Expansionary fiscal policy is aimed at stimulating economic growth, especially during downturns or recessions. It typically involves increasing government spending or reducing taxes to boost overall demand, leading to higher consumption and investment.

Contractionary Fiscal Policy

Contractionary fiscal policy is intended to slow down an overheated economy or control inflation by reducing aggregate demand. This is achieved by decreasing government spending or increasing taxes, which in turn reduces disposable income and dampens overall economic activity.

Fiscal Policy Tools

Fiscal policy tools, primarily government spending and taxation, are versatile instruments that can be used for either expansionary or contractionary purposes. The same set of tools is applied differently—either by injecting spending into the economy or by withdrawing it—to achieve desired macroeconomic outcomes.

Transcript

00:01 Hey guys and welcome to another economics example where we're going to be looking into fiscal policy some more.

00:06 So for this example, we're going to be looking into how the government actually implements these different policies.

00:12 So the fiscal policy tools.

00:15 It's actually the same for both.

00:17 They use the same tools, but it's how they're used that differs between them.

00:22 So for expansionary policy, spoiler alert, the tools used our government spending.

00:32 And taxes.

00:36 So for expansionary policy, the typical way that these tools are used is that spending increases to put more money into the economy and then taxes are decreased to also keep more money in the economy.

00:54 Because by taxing less, you're taking less money away from the people to use on government projects, which means they have more to increase their consumption in the gdp equation there, if you'll remember.

01:09 And then increasing spending will also increase the money in the economy because you're giving money to like construction companies, hospitals, all the areas that governments will spend money on, which will then increase, you know, the amount of employees they have.

01:26 And eventually people will get more money and then buy more stuff that way.

01:32 So then, you know, you might be asking yourself, how can they increase their spending but reduce the amount of taxes they have? and that is just through borrowing through other means or using money that they have leftover, which typically doesn't happen much.

01:50 It's not often leftover money, but there's other methods of borrowing beyond taxes that can pay for the increased spending that expansionary policy demands.

01:59 For contractionary policy, they're using the same two tools...

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