What is the difference between expansionary

policy and contractionary fiscal policy?

Here is your answer

Explanation:

First of all, it is important to understand what a fiscal policy really is. This is a tool used by the government to influence the aggregate demand of the economy and consequently, the total output produced by the economy. Government uses its own budget to do this. It alters its government spending (amount used to produce public goods, unemployment benefits ...) and the rate of taxes it imposes.

An expansionary fiscal policy is one that causes aggregate demand to increase. This is achieved by the government through an increase in government spending and a reduction in taxes. These two encourage consumption as they increase people's purchasing power. This can be seen graphically as a rightwards shift of the AD (aggregate demand) curve which leads to an increase in the equilibrium output of the economy and hence, an increase in GDP.

A contractionary fiscal policy is the opposite. The government decreases government spending and increases taxes. This causes consumption to fall as purchasing power declines. This can be represented as a shift to the left of the AD curve, reducing the equilibrium output of the economy and hence, reducing GDP. The government will apply each policy depending on the country's needs.