What are the two main types of fiscal policy?

The correct answer identifies the two primary strategies used by governments to influence their economies through fiscal policy, which are expansionary and contractionary fiscal policy.

Expansionary fiscal policy involves increasing government spending or decreasing taxes in order to stimulate economic growth. This approach is typically employed during periods of economic downturn or recession to boost demand, spur job creation, and enhance consumer confidence. By injecting more money into the economy, it aims to raise overall economic activity and shift the economy toward full employment.

Conversely, contractionary fiscal policy involves decreasing government spending or increasing taxes. This approach is often used when the economy is overheating, with high inflation rates or unsustainable growth. By tightening fiscal policy, the government can help cool down the economy and make sure that inflation remains in check, ensuring long-term stability.

The distinction between these two types of fiscal policy is crucial for understanding how governments attempt to manage economic cycles and their impacts on overall economic health. The other choices represent different areas of economic policy that do not directly pertain to fiscal policy, thus reinforcing why the first choice is the correct identification of the main types of fiscal policy.