Exploring Macroeconomics
Exploring Macroeconomics
8th Edition
ISBN: 9781544337722
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Chapter 16, Problem 1P
To determine

To explain:

The reason for government actions increasing deficits is considered expansionary fiscal policy and government actions decreasing deficits is considered contractionary policy.

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Explanation of Solution

Fiscal policy is similar to the monetary policy applied by central banks to maintain the flow of cash in the economy. The reason behind the increase in deficit is considered expansionary fiscal policy is thatit expands the money supply in the economy to increase the economic growth by combating the inflation. The expansionary fiscal policy will increase the government spending or reduces the taxes. These steps will lead to shortage of funds and will diminish the surplus.

The fiscal government actions that decrease the deficits are considered as contractionary fiscal policy. This is because a decrease in deficit reduces the money supply, which decreases the demand. This will in turn reduce the purchasing power of consumers as well. The contractionary fiscal policy is that situation when the consumers are left with less amount to spend.

Economics Concept Introduction

Fiscal policy:

That means in economics through which a federal government keeps a check and adjusts its expenditure level and tax rates, or duty charge is referred as fiscal policy. This policy helps to monitor and guide the country's economic situation.

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