The level and real GDP decreases. There are
The answer is a yes. It can be either an Expansionary Fiscal
Policy or a Contractionary Fiscal Policy depending on the scenarios it will
enable a country to have a stabilize healthy economy growth with the adjustment
of government spending and taxes.
Expansionary Fiscal Policy – usually when economic of a
country is facing recession. During this period, there will be an increase in government
spending such as education, healthcare, roads and so on. At the same time, reducing
taxes such as corporate tax, personal income tax and good & services tax. When
both characteristic had been initiated, there will be more jobs creation for
its citizen, foreign investor will invest more on our country, more tourist
will come by to spend and there will be an increase in consumer spending power
due to more disposable income therefore there will be a rightward shift of AD
curve when the components of CIG increase which also leads to the increase in
real GDP. In LRAS, there will be a decrease in inflation rate and a boost in
real GDP due to train workers from skill-futures programmes.
Contractionary Fiscal Policy – usually when economic of a country is
experiencing a rapid growth. During this period, there will be a decrease in
government spending and an increase in tax. With lesser grants and subsidies due
to government is spending less will leads to lower disposable incomes and
foreign won’t be investing due to high tax implemented. This resulted in
steadily slowing down the economic growth and easing the inflation rate to
safeguard them from high general price level for the consumers therefore there
will be a leftward shift of AD curve when the components of CIG decreases thus
both general price level and real GDP decreases.
There are bound to have limitation of both Expansionary
Fiscal Policy and Contractionary Fiscal Policy such as time lag due to longer
processing period before it actual endorsed or enforced.