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What is an Expansionary Fiscal Policy?

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  • Written By: Jim B.
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  • Last Modified Date: 13 November 2016
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An expansionary fiscal policy is one in which a government attempts to stimulate a struggling economy by injecting more money into it. This is generally achieved by an increase in various types of government spending and by a decrease in taxes for the public. The idea behind this type of fiscal policy is to give the economy a jolt to get it running smoothly once again. Unfortunately, such a policy usually means that a country will increase any deficit it might already have.

There are many different theories that economists and government financial experts must consider when an economy goes into the doldrums for a prolonged period of time. Many experts believe that the simple economic concepts of supply and demand will eventually reorganize and that the cyclical nature of economy means that there will be an eventual course reversal. Others argue that governments are responsible for stepping in when their nation is struggling financially and for taking aggressive steps to turn things back around. These people would likely argue for an expansionary fiscal policy to actively stimulate the economy.

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Government spending is the first major tool used to spearhead an expansionary fiscal policy. This can come in the form of spending projects designed to boost the business sectors, such as government financing of construction projects or other business initiatives. Other government funds can go directly to the people in the form of social insurance programs that benefit the poor, the sick, and any others most in need of a financial boost.

Lowering taxes is usually another necessary step taken by governments embarking on an expansionary fiscal policy. The lower taxes would conceivably stimulate the economy by putting more money in people's pockets, thus increasing spending and improving the business sector. This would cause employers to hire more people to keep up with increased demand for their products. In addition, governments may also provide tax incentives to improve certain struggling aspects of the economy, such as home sales or small business start-ups.

All of the costs associated with an expansionary fiscal policy are the reason used by its detractors to argue against it. For example, increasing payments to the elderly or the poor must be paid for at some point, and that payment may come in the form of higher taxes down the road. Since this is the case, this policy often means paying off present debts by creating even larger ones in the future. Proponents argue that a temporarily higher deficit might be a necessary evil when economic conditions are particularly dire.

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candyquilt
Post 3

Expansionary fiscal policies are a good thing. They can make a huge difference and literally pull an economy out of downfall by stimulating spending and production. I'm not saying that it's a key that opens all doors. Economists need to take care of other issues while the expansionary policies are in effect so that these problems don't crop up again. But as long as accurate predictions are made, it will be fine.

ZipLine
Post 2

@donasmrs-- I agree with you. Sometimes, when the negative consequences of an expansionary fiscal policy kicks in, the politicians who made the decisions are no longer in office and the new candidate is left to deal with it. I believe this is partly what happened with George Bush Jr. He left a mess when he left office and Obama had to deal with the consequences of economic decisions that his predecessor had made long ago.

donasmrs
Post 1

I realize that governments resort to this type of policy to help people. There is also usually the issue of lower approval rates for political parties and candidates. So they feel a responsibility to improve the economy, to both maintain votes in the future and also not to lose face to the people who trusted them.

But if we look at this issue from a larger scope, it's not good for the long-term. The money that the government pumps into the economy to expand it causes a lot of inflation because the money isn't produced in the market naturally through production. It's sort of like an artificial improvement. It does save the day, but it will cause more problems in the future when the effects die down and the inflation causes even more price hikes and unemployment.

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