An economic strategy taken by governments or central banks to increase economic growth and overall demand, especially during economic decline or recession.
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Last Updated: January 13, 2024 In This ArticleExpansionary policies are an economic strategy taken by governments or central banks to increase economic growth and overall demand, especially during economic decline or recession .
The government uses budgetary measures like increasing government spending and reducing tax rates to enhance disposable income to address economic slowdowns and recessions.
Expansionary policy involves using either monetary policy, fiscal policy, or both. It is a component of the Keynesian policy recommendation that aims to mitigate the negative impacts of economic cycles by encouraging increased consumer spending and business investments.
Central banks lower interest rates in expansionary monetary policy , making borrowing cheaper for businesses and individuals. These lower interest rates encourage spending and investment as saving becomes less attractive.
Expansionary fiscal policy involves increasing government spending or reducing taxes to increase the money supply in the economy .
Expansionary policy, rooted in Keynesian economic principles, aims to increase aggregate demand, stimulating overall economic activity, especially during economic downturns.
This approach addresses recessions by addressing the root cause: a lack of aggregate demand.
Increasing aggregate demand can enhance real future output. Keynes believed that unemployment resulted from a lack of overall demand in the economy, as wages were slow to decrease in response to decreased consumer spending.
Expansionary policy involves increasing business investments and consumer spending by increasing money in the economy. This can be achieved through government deficit spending or increased lending to businesses and consumers.
If expansionary policies are not carefully managed, they may have negative consequences and result in an unbalanced situation.
The effective execution of economic policies is not a one-day task; it takes a considerable amount of time to be implemented correctly, assess results, and make necessary adjustments accordingly.
Further, expansionary policies can be broadly categorized into monetary and fiscal policies.
Expansionary monetary policy operates by increasing the money supply faster than usual or lowering short-term interest rates.
The main objective of expansionary monetary policy is to make borrowing cheaper and encourage spending and investment.
It aims to boost economic growth by increasing the money liquidity in the market. This leads to higher investments, expanded business operations, and increased consumer spending.
Central banks implement this policy through various tools:
Expansionary fiscal policy refers to the deliberate use of increased government spending or reduced taxes to stimulate economic growth.
The main objective of expansionary fiscal policy is to reduce unemployment. Increased government spending leads to job creation and, thus, economic growth, while tax reductions empower individuals and businesses with more funds, motivating increased spending and investment.
Central banks implement this policy through various tools:
1. Government Spending: The government can spend more on infrastructure projects, education, and healthcare. This leads to job creation and economic stimulation.
2. Tax Cuts: Tax reductions increase disposable income, particularly for individuals and businesses. People tend to spend more when they have more money; therefore, consumer spending rises. Tax advantages for businesses might also encourage them to expand and create jobs.
3. Transfer Payments: Transfer payments involve direct financial assistance to individuals or groups. Making unemployment benefits last longer or increasing their amount provides a safety net for those affected by economic downturns.
Expanding welfare programs gives support to low-income individuals and families.
