{"id":32124,"date":"2021-09-28T17:40:47","date_gmt":"2021-09-28T17:40:47","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=32124"},"modified":"2026-03-08T09:40:18","modified_gmt":"2026-03-08T09:40:18","slug":"expansionary-and-contractionary-fiscal-policies","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/","title":{"rendered":"Expansionary and Contractionary Fiscal Policies"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which one of the following is least likely a reason to use fiscal deficits as an expansionary tool?\",\n    \"text\": \"Which one of the following is least likely a reason to use fiscal deficits as an expansionary tool?\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. A common argument against fiscal deficits is the crowding-out effect, where increased government borrowing displaces private-sector investment that could otherwise contribute to economic growth.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"The government may be crowding out private investments.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"The government may facilitate tax changes to reduce distortions in the economy.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"The government may stimulate employment when there is substantial unemployment in the economy.\"\n      }\n    ]\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Monetary and Fiscal Policy (2025 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 5)\",\n  \"description\": \"In this CFA Level I Economics lesson, Professor James Forjan explains monetary and fiscal policy concepts relevant to the CFA exam, including how governments and central banks influence economic activity through policy tools.\",\n  \"uploadDate\": \"2022-03-25\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/opwhOwJygDA\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=opwhOwJygDA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/opwhOwJygDA\",\n  \"duration\": \"PT31M45S\",\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/analystprep.com\/wp-content\/uploads\/2020\/01\/AnalystPrep-Logo.png\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/opwhOwJygDA?si=GQPTXMIQx0uHsgSu\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal policy are taxes and government expenditure. The government amasses taxes to finance its expenditures. Therefore, fiscal policy can affect production and may be used as an instrument for economic stabilization. It can either be contractionary or expansionary.<\/p>\n<p><!--more--><\/p>\n<h2><strong>The Government Budget<\/strong><\/h2>\n<p>A government budget is a document prepared by a political entity. A budget presents the amount of revenue the political entity aims to raise and the modalities it will use to raise it. Above all, a budget proposes how the revenue would be spent in the coming financial year.<\/p>\n<h4><strong>Budget Deficit<\/strong><\/h4>\n<p>A government\u2019s expense can surpass its revenue in a financial year creating a budget deficit. A budget deficit is a negative difference between expenditures and tax revenues for a fixed period of time. The government finances the budget deficit by borrowing when it issues long-term and interest-bearing bonds. These outstanding bonds and payments are known as the national debt.<\/p>\n<h4><strong>Budget Surplus<\/strong><\/h4>\n<p>When government expenditures are less than the tax revenues in any given financial year, the government runs on a budget surplus during that particular year. The surplus is simply the difference between government expenditure and tax revenues.<\/p>\n<h4><strong>Balanced Budget<\/strong><\/h4>\n<p>When revenues and government expenditures are equal, the government will run on a balanced budget during the financial year in question.<\/p>\n<h2><strong>Expansionary&nbsp;Fiscal Policy<\/strong><\/h2>\n<p>During a recession, the government employs idle resources and tries to boost economic output. This increased spending increases aggregate demand, hence, a higher real GDP. This is referred to as an expansionary fiscal policy. It is usually an attempt to raise employment rates and output. The expansionary policy includes:<\/p>\n<ul>\n<li>deficit spending;<\/li>\n<li>tax cuts; and\/or<\/li>\n<li>subsidies.<\/li>\n<\/ul>\n<h2><strong>Contractionary Fiscal Policy<\/strong><\/h2>\n<p>Contractionary fiscal policy is explained as a decline in government expenditure. Alternatively, it can be defined as a raise in taxes that causes the government\u2019s budget surplus to increase, or its budget deficit to decrease. A budget deficit or surplus usually determines the type of fiscal policy either as contractionary or expansionary. Contractionary fiscal policy includes:<\/p>\n<ul>\n<li>budget surplus; and\/or<\/li>\n<li>increased tax rates.<\/li>\n<\/ul>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>Which one of the following is <em>least likely<\/em> a reason to use fiscal deficits as an expansionary tool?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>The government may be crowding out private investments.<\/li>\n<li>The government may facilitate tax changes to reduce distortions in the economy.<\/li>\n<li>The government may stimulate employment when there is substantial unemployment in the economy.<\/li>\n<\/ol>\n<h4>Solution<\/h4>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>A common argument against raises in fiscal deficits is that the additional borrowing to fund the deficit in the financial markets will displace private-sector borrowing that would otherwise be invested by corporations that would create economic growth. This is referred to as&nbsp;\u201ccrowding-out.\u201d<\/p>\n<p><strong>B and C are incorrect<\/strong>. They are the reasons to use budget deficits.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal policy are taxes and government expenditure. The government amasses taxes to finance its expenditures. Therefore, fiscal policy can&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-32124","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes<\/title>\n<meta name=\"description\" content=\"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"og:description\" content=\"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-28T17:40:47+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-08T09:40:18+00:00\" \/>\n<meta name=\"author\" content=\"Kosikos Tuitoek\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kosikos Tuitoek\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\"},\"author\":{\"name\":\"Kosikos Tuitoek\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"headline\":\"Expansionary and Contractionary Fiscal Policies\",\"datePublished\":\"2021-09-28T17:40:47+00:00\",\"dateModified\":\"2026-03-08T09:40:18+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\"},\"wordCount\":486,\"articleSection\":[\"Economics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\",\"name\":\"Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2021-09-28T17:40:47+00:00\",\"dateModified\":\"2026-03-08T09:40:18+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"description\":\"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Expansionary and Contractionary Fiscal Policies\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\",\"name\":\"Kosikos Tuitoek\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"caption\":\"Kosikos Tuitoek\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/opwhOwJygDA\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"1906\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-09-28T17:40:47+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes","description":"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/","og_locale":"en_US","og_type":"article","og_title":"Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes","og_description":"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2021-09-28T17:40:47+00:00","article_modified_time":"2026-03-08T09:40:18+00:00","author":"Kosikos Tuitoek","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Kosikos Tuitoek","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/"},"author":{"name":"Kosikos Tuitoek","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"headline":"Expansionary and Contractionary Fiscal Policies","datePublished":"2021-09-28T17:40:47+00:00","dateModified":"2026-03-08T09:40:18+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/"},"wordCount":486,"articleSection":["Economics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/","name":"Expansionary and Contractionary Fiscal Policies - AnalystPrep | CFA\u00ae Exam Study Notes","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2021-09-28T17:40:47+00:00","dateModified":"2026-03-08T09:40:18+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"description":"Fiscal policies are carried out by the legislative and sometimes, the executive branch of the government. The two main instruments of fiscal","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-fiscal-policies\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Expansionary and Contractionary Fiscal Policies"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20","name":"Kosikos Tuitoek","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","caption":"Kosikos Tuitoek"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/opwhOwJygDA","og_video_type":"text\/html","og_video_duration":"1906","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-09-28T17:40:47+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32124","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=32124"}],"version-history":[{"count":6,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32124\/revisions"}],"predecessor-version":[{"id":59458,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32124\/revisions\/59458"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=32124"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=32124"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=32124"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}