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Expansionary Fiscal Policy

What is expansionary fiscal policy?

Expansionary fiscal policy is a strategic approach employed by governments to initiate aggregate demand within an economy. This method hinges on a twofold approach: elevating government expenditures and implementing tax reductions. The underlying rationale is to support economic activity, particularly during phases of economic downturns, such as recessions or compactions within the business cycle.

In short term, these expansionary measures tend to create budget deficits or trim surpluses. However, the radical concept is that by jumpstarting consumer spending through increased disposable income, the economy will experience growth over time. This growth-driven approach seeks to counterbalance near-term deficits with sustained economic expansion. The efficacy of this strategy lies in its ability to initiate a multiplier effect, where a relatively modest stimulus generates amplified economic reverberations across diverse sectors.

On the other side, there exists a counterpart to expansionary fiscal policy known as contractionary fiscal policy. This alternative avenue involves raising taxes or trimming government expenditures with the aim of tempering rapid economic growth. This approach is akin to applying brakes on a speeding economic engine, ensuring a controlled and sustainable rotation.

Example of Expansionary Fiscal Policy

Throughout the backdrop of the ongoing COVID-19 pandemic, numerous nations took proactive steps by enacting expansionary fiscal policies. The core objective was to alleviate the economic repercussions stemming from the global health crisis. Within this context, governments orchestrated a series of multifaceted measures.

These measures contained direct disbursements to individuals, prolongation of unemployment benefits, and earmarking of resources for bolstering healthcare infrastructures. Additionally, there was a dedicated focus on propping up businesses through comprehensive support initiatives, coupled with the injection of economic stimulus packages. The intent was crystal clear: to invigorate economic activity and counterbalance the adverse effects wrought by the pandemic's far-reaching implications