Question

How can expansionary and contractionary tax policies be used to manage the economy? Be sure to give your answer in two to three sentences.


Answer: Expansionary and contractionary policies can be used to encourage or discourage economic growth. Expansionary policies generally lower taxes and give consumers and producers additional money, which encourages spending and growth. On the other hand, contractionary policies generally raise taxes, which can give consumers and producers less to spend. This can cause less economic growth.

Answer 1

Answer: Sample Response

Expansionary and contractionary policies can be used to encourage or discourage economic growth. Expansionary policies generally lower taxes and give consumers and producers additional money, which encourages spending and growth. This is done when unemployment is high. On the other hand, contractionary policies generally raise taxes, which can give consumers and producers less to spend. This can cause less economic growth, but is necessary when the economy is growing too quickly and inflation is rising.

Answer 2

An expansionary tax policy can be used to stimulate economic growth when the economy is slowing down. By decreasing tax rates, disposable income increases and this would lead to an increase in consumer spending and economic growth.

A contractionary tax policy can be used to curb inflation. When price levels are rising, an increase in the tax rate would lead to a decrease in disposable income and consumer spending would reduce. This would lead to a decrease in inflation rate.

Expansionary and contractionary tax policies are types of fiscal policies.

Fiscal policy can be described as using government spending and taxation to manage the economy.

Types of fiscal policies

1. Expansionary fiscal policy is when the government increases the money supply in the economy either by increasing spending or cutting taxes.  
2. Contractionary fiscal policies is when the government reduces the money supply in the economy either by reducing spending or increasing taxes

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