a. What is the difference between contractionary and expansionary monetary policy? What is the difference between contractionary and expansionary fiscal policy? How does each policy affect the AD in the economy? b. What are the benefits and major problems of the fiscal policy and monetary policy?
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Finance: Discussion Questions
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The Difference between Contractionary and Expansionary Monetary Policy
There are two major types of fiscal and monetary policies namely, the contractionary and expansionary policies. According to (Gupta, 2004, p. 256) the contractionary monetary policy refers to an increase in the supply of money or a reduction in the interest rates. The contractionary monetary policy is the reverse of expansionary monetary policy, which refers to the fight of inflation through the decrease in money supply. This increases cost of borrowing, thus decreasing GDP and dampening of inflation.
The Difference between Contractionary and Expansionary Fiscal Policy
The contractionary fiscal policy refers to decrease in the government expenditure or an increase in taxes to slow economic growth rate (Cherunilam, 2006). The expansionary policy is quite the opposite of contractionary fiscal policy. Expansionary fiscal policy refers to an increase in the government expenditure or lowering of taxes to stimulate economic growth.
How Each Policy Affects the Aggregate Demand (AD) The expansionary fiscal and monetary policies increase the aggregate……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….
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