Explain the concept of contractionary fiscal policy and expansionary fiscal policy on:
a)Purchesing power
b)Inflation
c)Fiscal deficit
a) Contractionary fiscal policy is a policy that reduces the purchasing power of consumers by decreasing government spending and/or increasing taxes. This reduces the amount of money available for consumers to spend, which in turn reduces the demand for goods and services, leading to a decrease in prices. Expansionary fiscal policy is the opposite, and increases the purchasing power of consumers by increasing government spending and/or decreasing taxes. This increases the amount of money available for consumers to spend, which in turn increases the demand for goods and services, leading to an increase in prices.
b) Contractionary fiscal policy is designed to reduce inflation by decreasing the amount of money available for consumers to spend. This reduces the demand for goods and services, leading to a decrease in prices. Expansionary fiscal policy is designed to increase inflation by increasing the amount of money available for consumers to spend. This increases the demand for goods and services, leading to an increase in prices.
c) Contractionary fiscal policy is designed to reduce the fiscal deficit by decreasing government spending and/or increasing taxes. This reduces the amount of money available for the government to spend, leading to a decrease in the deficit. Expansionary fiscal policy is designed to increase the fiscal deficit by increasing government spending and/or decreasing taxes. This increases the amount of money available for the government to spend, leading to an increase in the deficit.