EXPANSIONARY AND FISCAL POLICY

TOOLS TO STABILIZE THE ECONOMY

Bumaras, Richelle
Mulato, Jasmine
Fiscal Policy refers to the use of
government spending and tax
policies to influence economic
conditions, especially
macroeconomic conditions.

These include aggregate demand

for goods and services,
employment, inflation, and
economic growth
• Fiscal policy is based on the theories of British economist John
Maynard Keynes, which hold that increasing or decreasing revenue
(taxes) and expenditure (spending) levels influence inflation
employment and the flow of money through the economic system.

• Keynesians believe that government taxation and spending can be

managed rationally and used to counteract the excesses and
deficiencies of private sector consumption and investment spending in
order to stabilize the economy.
FISCAL POLICY GOALS

• Influence economic growth

• Achieve full employment
• Maintain price stability (control
inflation)
Fiscal policy factors and tools
Economic factors
The success of the economy is commonly measured by a few factors,
including GDP. Another factor is aggregate demand, which is the sum
of goods and services produced by a nation purchased at a certain
price point. The aggregate demand curve dictates that at lower price
levels, more goods and services are demanded, while there is less
demand at higher price points.
Fiscal policy affects these measurements, with the goal of increasing
GDP and aggregate demand in a sustainable manner. This happens by
changing three factors.

■ .Business tax policy: Taxes that businesses pay to the

government affects its profits and investment spending.
Lowering taxes increases both aggregate demand and business
investment opportunities
■ Government spending: Aggregate demand is increased by the
government’s own spending
■ 3.Individual taxes: Taxes on individuals – such as income
tax – affect their personal income and how much they can
spend, injecting more money back into the economy.

■ Fiscal policy typically needs to be altered when an

economy is running low on aggregate demand and
unemployment levels are high.
 Fiscal Policy Tools

Government Spending TAXES

■ Government spending (expenditures) is the total
sum of money a government uses to finance its
activities and functions. This can range from
infrastructure development and public services like
healthcare and education to defense and social
security. It's essentially how a government uses its
budget to support and improve society.
■ Taxes influence the economy by determining how much
money the government has to spend in certain areas and
how much money individuals should spend. For
example, if the government is trying to spur consumer
spending, it can decrease taxes. A cut in taxes provides
families with extra cash, which the government hopes
will in turn be spent on goods and services, thus spurring
the economy as a whole.
Types of Fiscal Policies

Expansionary Policy

and

Contractionary Policy
■ What Is an Expansionary Policy?
Expansionary, or loose policy is a form of macroeconomic
policy that seeks to encourage economic growth.

Expansionary policy can consist of either monetary

policy or fiscal policy (or a combination of the two). It is
part of the general policy prescription of Keynesian
economics, to be used during economic slowdowns and
recessions in order to moderate the downside of economic
cycle
 Expansionary Policy

Reduce Taxes

Increase Government
Spending
■ The goal of expansionary fiscal policy is to put more
money in the hands of consumers so they spend more
to stimulate the economy. Explained in economic
language, the goal of expansionary fiscal policy is to
bolster aggregate demand in cases when private
demand has decreased.
■ The logic behind this approach is that when people pay
lower taxes, they have more money to spend or invest,
which fuels higher demand. That demand leads firms to
hire more, decreasing unemployment, and causing
fierce competition for labor. In turn, this serves to raise
wages and provide consumers with more income to
spend and invest. It's a virtuous cycle or
positive feedback loop.
■ Alternately, rather than lowering taxes, the
government may seek economic expansion by
increasing spending (without corresponding tax
increases). Building more highways, for
example, could increase employment, pushing
up demand and growth.
■ Contractionary fiscal policy
■ is used to slow economic growth, such as when
inflation is growing too rapidly. The opposite of
expansionary fiscal policy, contractionary fiscal
policy raises taxes to cut spending. As consumers
pay more taxes, they have less money to spend, and
economic stimulation and growth slow.
 Contractionary Policy

Increase Taxes

Reduce Government
Spending
In the face of
mounting inflation and other expansionary symptoms,
a government can pursue contractionary fiscal policy,
perhaps even to the extent of inducing a brief recession
in order to restore balance to the economic cycle.

The government does this by increasing taxes, reducing

public spending, and cutting public sector pay or jobs.
CONCLUSION
Governments typically use fiscal policy to promote strong and sustainable
growth and reduce poverty. These policies include either increasing or
decreasing taxes and increasing or decreasing government spending. With
the use of fiscal policy the government aims to achieve their intended goal
of managing the direction of the economy. Implementation of these policies
results in a change in the aggregate demand and the corresponding
parameters such as aggregate output, investment and employment. And the
two mains types of fiscal policy are Expansionary fiscal policy is intended
to boost growth to a healthy economic level, which is required during
the business cycle's contractionary period. The government seeks to reduce
unemployment, raise consumer demand, and stop the recession and
Contractionary Fiscal Policy occurs when the government increases taxes
and/or decreases its spending to decrease aggregate demand in the economy
REFERENCES
■ https://open.lib.umn.edu/principleseconomics/chapter/27-2-the-use-of-fiscal-policy-to-stabilize-th
e-e
conomy/

https://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s15-02-the-use-of-fiscal
-policy-to-st.htm

https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Fiscal-
Policy#:~:text=Fiscal%20policy%20is%20the%20use,sustainable%20growth%20and%20reduce
%20poverty.
THANK YOU