According to Alesina and Ardagna (2013), fiscal policy refers to the methods used by the government to adjust its revenue collection methods, primarily taxation, and its expenditure methods in order to influence the nation's economic activities, such as aggregate demand, saving and investment, and income distribution. Fiscal policy works by increasing or decreasing taxation and government spending.
Expansionary fiscal policy, as the term implies, grows the economy. It entails the government taking particular actions, such as lowering tax rates, increasing government spending, and making direct payments to customers. These arrangements boost economic activity, resulting in higher aggregate demand and supply. Subsequently, this amplifies the production leading to a higher economic output.
On the other hand, contractionary fiscal policy slows down the economy when there is a high and rapid economic growth (Alesina & Ardagna, 2009). This occurs through swelling the rates of tax and plummeting the government outgoings, not to mention increasing interest rates and shrinking the money supply in the market. The policies lead to a fall in aggregate demand as well as supply, sequentially lowering the production and output.
The expansionary policy has the effect of decreasing the cost of the factors of production for a particular industry. This encourages them to heighten their production level hence more profit and growth for the industry. Contrary, contractionary policy amplifies the cost of production leading to diminished production and shying off prospective investors (Barnett & Ossowski, 2002).
In the light of two fiscal policies, the expansionary policy seems most appropriate today as all regions are all in the look to advance and develop their economies. Creating a lesser tax burden on their shoulders encourages taxpayers to invest rather than save.
References
Alesina, A., & Ardagna, S. (2013). The design of fiscal adjustments. Tax Policy and the Economy, 27(1), 19-68.
Alesina, A., & Ardagna, S. (2009). Tales of fiscal adjustment. Economic policy, 13(27), 488-545.
Barnett, M. S., & Ossowski, M. R. (2002). Operational aspects of fiscal policy in oil-producing countries (No. 2-177). International Monetary Fund.
