ABSTRACT

Economists often disagree about which tax and spending policies are best in different economic situations. These debates are over fiscal policy—what government spends, how it gets the money that it spends, and the effects of these activities on gross domestic product (GDP) levels. To complete the picture of fiscal policy, we need to include the role of taxes and transfer payments. If voters and government officials do not want to raise government spending on goods and services, they have another option. To raise GDP, the government could cut taxes or increase transfer payments. Increasing government spending is an example of what economists refer to as expansionary fiscal policy. Other expansionary fiscal policies are increasing transfer payments or lowering taxes. The goal of expansionary fiscal policy is to expand the economic activity to its full-employment level.