What is the current U.S. Fiscal Policy – is it expansionary or contractionary? I

Question

What is the current U.S. Fiscal Policy – is it expansionary or contractionary? If the current GDP has declined or expanded over the past 2 quarters at least, which of the tools of fiscal policy would you use to try to rein in the economy and how is this tool expected to affect Aggregate Demand? Give some examples of past U.S. fiscal policies and comment on their effectiveness. If you were in charge of making changes to U.S. fiscal policy, what changes will you make given the current economic conditions? What are some limitations of fiscal policy? Discuss some other goals besides economic stability that the government may have that would thwart fiscal policy.

Explanation / Answer

Expansionary fiscal policy: This is the policy of government for increasing spending to boost up the economy.

Contractionary fiscal policy: This is just opposite of expansionary policy to cut spending for decreasing prices.   

The current fiscal policy in the US is expansionary. The country has just overcome the recession phase. Therefore, the economy requires investments in projects for removing unemployment and increasing GDP.

If the current GDP has declined, the expansionary fiscal policy should be taken by the government. Under this policy the government spends more for economical development. More and more projects will develop, people get jobs, and earnings will increase. Such increase in output leads to increase in aggregate demand.

If the current GDP has expanded, the contractionary fiscal policy should be taken by the government. Under this policy government spends less for regulating economical crisis like inflation.   Inflation is the effect of excess money supply in the market—People are having enough money in hand, which increases their demand and it turns into inflation. If the spending is checked, the supply would be in control. The aggregate demand will fall automatically.

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