Question

Identify each scenario as an example of expansionary fiscal policy, contractionary fiscal policy, or not an example of fiscal policy.

Answer 1

According to macroeconomic theory and money supply in the economy, the scenario as an example of expansionary fiscal policy includes "A decrease in taxes."

Other scenarios as an example of expansionary fiscal policy include the following:

• An increase in government spending;
• An increase in corporate bonds purchased;
• An increase in the money supply;

Expansionary fiscal policy is a type of policy designed to increase the money supply in the economy.

On the other hand, examples of contractionary fiscal policy include the following:

• A decrease in government spending;
• A decrease in transfer payments to dampen economic activity;
• An increase in taxes;
• A decrease in the money supply;

Contractionary fiscal policy is a type of policy designed to decrease the money supply in the economy.

However, the scenarios which are considered as not examples of fiscal policy include the following:

• A decrease in the unemployment rate;

Hence, in this case, it is concluded that fiscal policy used by the government can either be expansionary or contractionary.

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