Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time. In pursuing expansionary policy, the government increases spending, reduces taxes, or does a combination of the two. By using subsidies, transfer payments (including welfare programs), and income tax cuts, expansionary fiscal policy puts more money into consumers' hands to give them more purchasing power. It also reduces unemployment by contracting public works or hiring new government workers, both of which increase demand and spurs consumer spending, which drives almost 70% of the economy. The other three components of gross domestic product are government spending, net exports, and business investment., Corporate tax cuts put more money into businesses' hands, which the government hopes will be put toward new investments and increasing employment. Treasury Direct. Congress must also pass legislation when it wants to cut taxes. It is the opposite of contractionary monetary policy. GovInfo.gov. Politicians often use expansionary fiscal policy for reasons other than its real purpose. Expansionary Fiscal Policy Click card to see definition An increase in government purchases, decrease in net taxes, aimed to increase aggregate demand enough to reduce unemployment back to equilibrium Click again to see term "Monetary Policy and the Federal Reserve: Current Policy and Conditions." "The Economic Impact of the American Recovery the Economic Impact of the American Recovery and Reinvestment Act Five Years Later," Page 51. Obama White House. Eventually, its budget deficit will become too large, driving up its debt to an unsustainable level. The multiplier effect of expansionary policy spurs economic growth, which leads to increased investment, consumption and employment. Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. expansionary or tight fiscal policy Automatic fiscal stabilisers – If the economy is growing, people will automatically pay more taxes ( VAT and Income tax) and the Government will spend less on unemployment benefits. Contractionary fiscal policy occurs when Congress raises tax rates or cuts government spending, shifting aggregate demand to the left. During recessionary periods, a budget deficitnaturally forms. Expansionary fiscal policy is used by the government when trying to balance the contraction phase in the business cycle. An expansionary policy is the most common type of fiscal policy governments pursue. The Treasury Department prints paper currency and mints coins. The Federal Reserve manages monetary policy to keep debt from spiraling out of control. The national debt is close to $23 trillion—which is more than the country produces in a year. When the debt-to-GDP ratio is more than 100%, investors get worried, buy fewer bonds, and send interest rates higher. All of which can slow economic growth. It involves government spending exceeding tax revenue by more than it has tended to, and is usually undertaken during recessions. Why Did Obama Extend the Bush Tax Cuts in 2010? The Surprising Truth About the US Debt Crisis, Introduction to U.S. Economy: Fiscal Policy, Manchin Only Senator to Vote Against Nuclear Option in 2013, 2017 and Today. • Expansionary fiscal policy is a form of fiscal policy that involves decreasing taxes, increasing government expenditures or both, in order to fight recessionary pressures. Accessed Jan. 31, 2020. Expansionary fiscal policy is the use of taxes or government spending to boost aggregate demand. The most widely-used is expansionary, which stimulates economic growth. 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