How do expansionary and contractionary fiscal policies affect the economy?

How do expansionary and contractionary fiscal policies affect the economy?

Expansionary fiscal policy occurs when the Congress acts to cut tax rates or increase government spending, shifting the aggregate demand curve to the right. Contractionary fiscal policy occurs when Congress raises tax rates or cuts government spending, shifting aggregate demand to the left.

Why is contractionary fiscal policy used?

Contractionary policy is used in times of economic prosperity because it: Slows inflation. To slow inflation, governments may enact contractionary fiscal policy in order to decrease the money supply and aggregate demand, which will lead to decreased output and lower price levels.

How can the use of fiscal and monetary policy influence the overall domestic economy?

Fiscal policy affects aggregate demand through changes in government spending and taxation. Those factors influence employment and household income, which then impact consumer spending and investment. Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate.

What are the major problems of fiscal policy?

Poor information. Fiscal policy will suffer if the government has poor information. E.g. If the government believes there is going to be a recession, they will increase AD, however, if this forecast was wrong and the economy grew too fast, the government action would cause inflation.

Who determines repo rate?

RBI

What is SBI PLR rate?

12.15

What is repo with example?

In a repo, one party sells an asset (usually fixed-income securities) to another party at one price and commits to repurchase the same or another part of the same asset from the second party at a different price at a future date or (in the case of an open repo) on demand. An example of a repo is illustrated below.

What happens if MSF is increased?

Due to the increase in the rate of MSF, borrowing becomes expensive for the banks and as a result, the loans get expensive for the borrowers due to the low obtainability of the rupee.