ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -This means that to help stabilize the economy, the government should run large budget deficits during economic downturns and run budget surpluses when the economy is growing. These are known as expansionary or contractionary fiscal policies, respectively.

Detailed explanation-2: -Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending.

Detailed explanation-3: -Contractionary fiscal policies typically slow economic growth. Reducing government spending slows an economy, as does increasing tax revenue. However, contractionary fiscal policy is typically used to slow an economy that is growing quickly.

Detailed explanation-4: -When GDP in a nation is growing too fast, causing inflation to increase beyond a desirable rate of 2%, central banks will implement a contractionary monetary policy. The Federal Reserve, or any central bank, has three primary tools to reduce the money supply.

Detailed explanation-5: -Contractionary and expansionary policies involve modification of the level of money supply in an economy. An expansionary policy increases the supply of money in an economy. On the other hand, a contractionary policy decreases the supply of a country’s currency.