When Experiencing An Inflationary Spiral Would You Use Expansionary Or Contractionary Fiscal Policy?
Answer:
The term inflation is defined as the rise in the general horizontal of prices. It is measured against a baseline of purchasing power. The term fiscal policy is defined as the economic term which define a set of principles and decisions which are taken by the government of a country in setting the stratum of public expenditure and how that expenditure is funded.
When the government enacts a policy in which the output is reduced, the taxes are raise and the expenditure by the government is reduced, it is known as a contractionary fiscal policy. On the other hand, when the policy enacts a policy in which the output is increased, the taxes are lowered and the expenditure by the government is increased, it is specified as an expansionary fiscal policy.
The government usually follows the contractionary fiscal policy in the situation of spiralling inflation. In other words, the government raise the taxes, reduces the output and reduces its expenditure when there is a rise surrounded by the rate of inflation. This is to reduce the gap caused by the resulting fiscal deficit.
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