7.5.1. Expansionary vs. Contractionary
During a recession, the federal government may try to stimulate the economy by encouraging an increase in consumer spending. This is an expansionary fiscal policy. It may include either of the following:
- • Lowering taxes to give consumers more money to spend and businesses greater profits
- • Increasing government spending to create more jobs and put more spending money in consumers’ pockets
Some examples of expanded government spending are:
- • Increasing unemployment insurance and welfare benefits
- • Building more roads
- • Increasing military spending
During a period of expansion, the government may use contractionary fiscal policy to keep inflation in check. Contractionary fiscal policy includes reducing government spending and raising federal taxes. Both of these measures take dollars out of consumers’ hands, reducing the demand for goods and services, which, in turn, lowers inflation.
Fiscal policy is slower and more complicated than monetary policy, because it inv