ECO/372 ECO370 ECO 372 Week 2 Discussion Question 4

ECO/372 ECO370 ECO 372 Week 2 Discussion Question 4

What is the difference between contractionary and expansionary fiscal policies? Which is more appropriate today? Explain your answer. How might contractionary and expansionary fiscal policies affect your organization?

In general, our chapter 10 reading material describes fiscal policy as “the deliberate change in either government spending or taxes to stimulate or slow down the economy” (Colander, 2010, pg 247 para 2). The goal of decision makers is to attempt to realign the aggregate demand by a shift in order to keep or maintain output at its potential—this is a very complicated process and is not easily achieved due to the many dynamics of potential output:

·         Changes to government spending and taxes are slow legislative process.

·         There is no proven method for measuring potential output.

·         Falling asset prices undermine the stability of the financial system.

These fiscal policy events are described as expansionary fiscal policy, which is when the aggregate income is too low. The other is contractionary fiscal policy, which is when aggregate income is too high. The budget deficit represents the expenditures minus government revenue. The difference between these two fiscal policies is the way in which the government reacts to the economic issue; it will either need to increase spending and cut taxes (expansionary) or increase taxes and cut spending (contractionary) (Colander, 2012)...