What distinguishes expansionary fiscal policy from contractionary fiscal policy?

The distinction between expansionary fiscal policy and contractionary fiscal policy lies fundamentally in their impact on the economy through government spending and taxes. Expansionary fiscal policy aims to stimulate economic growth, typically during a recession or period of economic slowdown, by increasing government spending or decreasing taxes. This injects more money into the economy, boosting demand for goods and services, and encouraging consumer spending and investment.

On the other hand, contractionary fiscal policy is employed to cool down an overheated economy, usually characterized by high inflation. This type of policy involves decreasing government spending or increasing taxes, which effectively takes money out of the economy, reducing overall demand.

Recognizing that expansionary fiscal policy focuses on increasing spending aligns with its goal of fostering economic activity, while contractionary fiscal policy's focus on reducing spending underscores its intent to stabilize or decelerate economic growth.