Difference between Contractionary and Expansionary Fiscal Policy

Fiscal policy is the financial tool that is used by the government to influence the aggregate demand of the economy and also the total output of the economy.

Fiscal policy works by reducing or increasing the government spending and taxes as and when required for controlling the economy.

There are two kinds of fiscal policy which is contractionary and expansionary fiscal policy.

Contractionary fiscal policy is said to be in action when the government reduces spending and increases the taxes at the same time in the country.

The result of such a move is that there is very less money available in the market. It leads to reduction in the purchasing power which results in declining consumption.

As less capital is available for business, the economy contracts and also causes unemployment. Contractionary policy is used to control inflation.

Expansionary fiscal policy is said to be in action when the government increases the spending and lowers tax rates for boosting economic growth. This increases consumption as there is a rise in purchasing power. Businesses get easy access to credit and therefore invest in new projects and thus, GDP of the nation is increased.

Now, let us look at some of the points of difference between the contractionary and expansionary fiscal policy.

Contractionary Fiscal Policy

Expansionary Fiscal Policy

Definition

Contractionary fiscal policy is defined as the type of fiscal policy that works toward contracting the economy

Expansionary fiscal policy is defined as the policy that works towards promoting the consumption in the economy. It works for expansion of the economy.

Impact on Aggregate Demand

It results in reduction of the aggregate demand

It increase the aggregate demand

Impact on Consumption

Consumption decreases

Consumption increases with expansionary fiscal policy

Impact on Purchasing Power

Decline in purchasing power

Increase in purchasing power

Impact on Inflation

It is implemented to keep inflation in check

It is not used for any such purpose

Impact on fiscal deficit

Decrease in fiscal deficit is indicative of contractionary fiscal policy

Increase in fiscal deficit is indicative of expansionary fiscal policy

This article was all about the topic of difference between Contractionary and Expansionary Fiscal Policy, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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