Explain the aspects of expansionary and contraction fiscal policy. During which phases of the business cycle would each be appropriate?
What will be an ideal response?
Expansionary fiscal policy refers to increases in government spending or decreases in taxes or both, so that the net effect on aggregate demand is an increase in net government spending. Contraction fiscal policy is the opposite: an increase in taxes or decrease in government spending or both, so that the net effect on aggregate demand is a decrease in net government spending.
Expansionary policy would most likely be used during a recession (or trough) phase. A contraction policy would most likely be employed near the peak of the business cycle as the economy reaches full-employment GDP and the potential for inflation accelerates.
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a. True b. False
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