Expansionary Fiscal Policy

Expansionary Fiscal Policy is identified when government spending is higher than its revenue. Expansionary fiscal policy can be used in order to either stimulate a sluggish economy or to slow down an economy that is growing at a rate that is getting out of control (which can lead to inflation or asset bubbles). Fiscal policy directly affects the aggregate demand(AD) of an economy. Aggregate Demand = Consumption + Investment + Government Spending + Net Exports Fiscal Policy has an effect on each of these categories (Forsythe, 2012). Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced—that is, gross domestic product. his will look like the government budget has a
Moreover, additional government purchases lead to a relatively larger government sector (Carol, 2013). There are stabilizers in the fiscal policy and they can be either automatic or discretionary. Automatic stabilizers expand the policy during a recession and contract during economic booms. An example of this would be unemployment insurance, wherein the government would pay out more during a recession. Likewise, taxes are proportional to wages and profits, the amount of taxes collect is higher during a boom than a recession. Moreover, automatic stabilizers—and their effects—are automatically withdrawn as conditions improve (Horton 2012). Discretionary policy is a response to economic conditions. It is a way to moderate business cycle swings. Most of the time discretionary suggestions are heard during a recession when there is a need for tax cuts to boost the economy and get things going again. These suggestions are often not able to help the economy because of the “inside-lag- or the gap between the time of the need and the time the suggestions become effective. Another reason why discretionary policy is believed to be ineffective is that the monetary policies are more agile and quicker to respond than fiscal policy, I