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In this video, we will be discussing the difference between expansionary fiscal policy and contractionary fiscal policy.
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To begin, however, let's first discuss fiscal policy in general, and then we'll come back to the expansionary and contractionary distinction.
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Fiscal policy relates to the budgetary decisions that congress can take in order to ensure that we have a healthy, steady economy.
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Now, what do we mean exactly when we're talking about budgetary decisions? well, it all has to do with how the government spends its money and how it makes it, money.
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Now, it can spend its money in a variety of ways.
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For example, infrastructure, for instance, it can, the government can decide to build bridges or even highways, but it can also spend its money through welfare programs such as social security benefits or unemployment benefits.
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And to fund all the spending, the government makes money by collecting taxes, like income taxes or corporate or business taxes.
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So there are many ways in which the government can spend and collect money.
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But for clarity, let's consider them abstractly as ways in which the government can spend money and ways in which the government can collect money.
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Now, suppose we're in the state of the world where the economy has faced a recession, or maybe experienced heavy unemployment, or is just generally on the decline.
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Then congress wants to boost the economy by putting more money in the hands of the individual.
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And in that way, the individual can spend money and activate the economy.
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These types of policies to correct for this decline fall under expansionary policies and it effectively increases the aggregate demand curve and raises economic activity.
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This happens by increasing government spending and decreasing taxes.
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Increasing government spending, say in the form of infrastructure like building bridges and highways, essentially puts more jobs, out in the economy and people are able to work.
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And by providing more in welfare programs, people will have more money to be able to spend.
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And so by putting more money in the hands of individuals, the government is able to kind of boost the economy, which is why we call it an expansionary policy.
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Now, the cons of this is that it lowers government revenue...