What is the difference between expansionary and contractionary fiscal policy in Keynesian Economics?

In Keynesian Economics, expansionary and contractionary fiscal policies are two approaches used to manage the overall health and stability of an economy.

Expansionary fiscal policy refers to the use of government spending and taxation policies to stimulate economic growth and increase aggregate demand. The main objective of expansionary fiscal policy is to boost consumer spending, business investment, and overall economic activity. This is typically achieved through measures such as increasing government spending on infrastructure projects, reducing taxes, or providing tax incentives to encourage private sector investment. By injecting more money into the economy, expansionary fiscal policy aims to create jobs, increase production, and ultimately lead to economic expansion.

On the other hand, contractionary fiscal policy is employed to slow down an overheating economy and control inflationary pressures. It involves reducing government spending and increasing taxes to decrease aggregate demand and curb excessive economic growth. The primary goal of contractionary fiscal policy is to prevent the economy from overheating and experiencing inflation by reducing consumer spending and investment. This can be achieved through measures such as cutting government spending on non-essential programs, increasing taxes on goods and services, or reducing tax incentives for businesses. By reducing the amount of money circulating in the economy, contractionary fiscal policy aims to slow down economic growth and stabilize prices.

In summary, the main difference between expansionary and contractionary fiscal policy in Keynesian Economics lies in their objectives and the measures employed. Expansionary fiscal policy aims to stimulate economic growth and increase aggregate demand through increased government spending and reduced taxes, while contractionary fiscal policy aims to slow down an overheating economy and control inflation by reducing government spending and increasing taxes.