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What are some examples of expansionary fiscal policy?

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Quick Answer

Some examples of expansionary fiscal policy include lowering taxes and increasing government spending. An expansionary fiscal policy is implemented by a government when they want to raise the overall amount of money available to citizens.

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Full Answer

Lowering income taxes leaves people with more disposable income which, in turn, is likely to lead to an increase in the purchase of consumer goods. Alternatively, governments might opt for issuing a one-off income tax rebate, essentially for the same outcome of boosting consumer spending.

Increasing government spending, another means for implementing expansionary fiscal policy, involves channeling more funds into various government departments or agencies. The additional money serves to boost production, income and employment.

Transfer payments represent a third type of expansionary fiscal policy tool. These include Social Security benefits, unemployment checks and low-income welfare payments. For an expansionary fiscal policy, transfer payments such as these might be increased by a certain percentage, or recipients might be given a one-off lump sum in addition to their usual allowance. This is intended to increase disposable income and therefore consumer spending.

Expansionary fiscal policy is typically implemented during unstable business cycles, when the level of aggregate production is far lower than available resources allow. This usually leads to an increased unemployment rate, low disposable income, low spending and a recessionary gap.

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