Question

How can expansionary and contractionary tax policies be used to manage the economy? Be sure to give your answer in two to three sentences.
Answer: Expansionary and contractionary policies can be used to encourage or discourage economic growth. Expansionary policies generally lower taxes and give consumers and producers additional money, which encourages spending and growth. On the other hand, contractionary policies generally raise taxes, which can give consumers and producers less to spend. This can cause less economic growth.

Answer 1

Expansionary fiscal policy refer to lowering taxes or increasing government spending. When the government lowers taxes, it increases the disposable income of the consumers, thereby increasing the aggregate demand for goods in the economy. Similarly, when the government increases government spending it directly increases the aggregate demand in the economy. Both resulting in economic growth.

On the other hand, Contractionary fiscal policy is related to increasing taxes or lowering government spending. increase in Taxes will lower disposable income and thereby decrease the aggregate demand in the economy. Similarly, less government spending will directly lower aggregate demand and cause a reduction in economic growth.

Answer 2

Answer: Sample Response

Expansionary and contractionary policies can be used to encourage or discourage economic growth. Expansionary policies generally lower taxes and give consumers and producers additional money, which encourages spending and growth. This is done when unemployment is high. On the other hand, contractionary policies generally raise taxes, which can give consumers and producers less to spend. This can cause less economic growth, but is necessary when the economy is growing too quickly and inflation is rising.