Expansionary and Contractionary policies

Expansionary and Contractionary policies - to move sharply...

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Expansionary and Contractionary policies: Fiscal policy becomes meaningful when budgets either show deficits or surpluses. The deficit budget is also known as an expansionary policy. This is because through deficits and enhanced public spending, the overall level of effective demand can be expanded. Such a policy is pursued during the period of deflation. Under such conditions the price level is depressed, the output level is falling and the level of unemployment is increasing. Therefore the rising level of effective demand is expected to act as a remedy. On the other hand a surplus budget (which is also known as contractionary) policy is useful under inflationary conditions. During inflation, the general price level shows a strong tendency
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Unformatted text preview: to move sharply upwards. Therefore such a situation can be corrected by withdrawing some purchasing power from the people. This helps to bring down the level of effective demand. As is mentioned above, classical economists generally favored a balanced budget. It is only Keynes and his followers who have popularized expansionary and contractionary policies. However, here again the Keynesians emphasize expansionary policies. It is only in exceptional situations of running away conditions of inflation that the contractionary policy may be called in. Both expansionary and contractionary policies can be illustrated....
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