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Contractionary Fiscal Policy

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Fiscal policy is government policy that is implemented to reach macroeconomic policy goals. It is more direct than monetary policy because it is carried out by the United States’ Government. The government recently passed expansionary fiscal policy, in the form of a tax plan. Some key factors of the tax plan include: lower corporate taxes, temporary Lower individual rates, and Less inheritance tax (BBC). Expansionary fiscal policy in the form of tax reductions leads to an increase in consumption and investment. This results in an increase in aggregate demand. The goal of expansionary fiscal policy is to boost the economy. This was not the right time to implement expansionary fiscal policy, because inflation is currently a concern. Contractionary policy is used when the economy is doing well, but there are worries about inflation. Contractionary policy is necessary when the economy is growing too fast or hits a wall. Due to the inflation rate bring 2.13 percent, I believe that the United States’ Government should have participated contractionary fiscal policy, instead of an expansionary tax plan (FRED, St. Louis). …show more content…

First, the government can decrease its spending which leads to a decrease in consumption and investment. This will then decrease aggregate demand. Another way the government can implement contractionary policy is to increase in taxes. This will also lead to a decrease in consumption and investment, because households will have less disposable income and less money for investment spending. Aggregate demand will decrease and shift to the left. The third way would be when the government buys bonds and “sits” on them. This takes money out of the economy, causing a decrease in consumption, investment, and aggregate

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