Contractionary Fiscal Policy Expansionary Fiscal Policy

Definition

Contractionary fiscal policy is defined as the type Expansionary fiscal policy is defined as the
of fiscal policy that works toward contracting the policy that works towards promoting the
economy consumption in the economy. It works for
expansion of the economy.

Impact on Aggregate Demand

It results in reduction of the aggregate demand It increase the aggregate demand

Impact on Consumption

Consumption decreases Consumption increases with expansionary fiscal

policy

Impact on Purchasing Power

Decline in purchasing power Increase in purchasing power

Impact on Inflation

It is implemented to keep inflation in check It is not used for any such purpose

Impact on fiscal deficit

Decrease in fiscal deficit is indicative of Increase in fiscal deficit is indicative of

contractionary fiscal policy expansionary fiscal policy
Direct taxes are imposed by the state upon

persons who are expected to bear the burden of

these taxes and who are not ex pected to be able

to shift the tax burden to other persons. In other

words, in the case of direct taxes, impact and

incidence are on the one and the same person.

Indirect taxes are taxes which are imposed upon

persons, who are expected to shift the burden of

the tax to other persons. In other words, in the

case of indirect taxes, usu ally the impact and

incidence will be on different persons.