The Strategy Of Contractionary Fiscal Policy - 1194 Words

Utilizing the income-expenditure approach examine the likely consequences for the UK economy of the government’s attempt to cut its spending and raise taxation. Outline the suggested long-term benefits of such a policy? Where the government reduces government expenditure and raises taxation is known as contractionary fiscal policy. The government uses such policy in order to steer the economy into steady growth by preventing an inflationary gap from occurring. If an economy is growing too fast, for example if unemployment is too low an inflationary gap will form. (Forsythe, 2012) An inflationary gap tends to worsen the balance of payments as home incomes rise, and domestic goods prices also rise, consumers will prefer to import cheaper foreign goods leading to fewer domestic exports being sold (Sloman, et al., 2003). This could have vital consequences on our economy. Therefore the government has a pivotal role in ensuring the economy is steady and the policy they use is contractionary fiscal policy to ensure that. Hence, the aim of this essay is to investigate the strategy of contractionary fiscal policy specifically highlighting on the benefits and long term costs of using this policy; using the in come expenditure approach to illustrate the effects it has on firms and households. Contractionary fiscal policy is used when economic instability occurs- when the economy is experiencing extreme growth which results in the price level rising significantly.Show MoreRelatedFiscal Policies And The Fiscal Policy1091 Words   |  5 PagesThe fiscal policy is the means by which the government of a country adjusts its spending levels and the tax rates that are applied so as to monitor and influence a country’s economy. On the general scale, there are two types of fiscal policies. These are the contractionary and the expansionary fiscal policy. 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