Principles of Macroeconomics / Unit 8 MAC 0726 short lesson, about 20 seconds
Expansionary and Contractionary Policy
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The idea
Expansionary policy raises real GDP by shifting aggregate demand right. Contractionary policy lowers it by shifting aggregate demand left.
In practice
Higher government purchases or a tax cut expand; the reverse contracts.
Where people slip
Expansionary policy closes a recessionary gap at the cost of a higher price level, and contractionary policy closes an inflationary gap at the cost of lower output on the way.
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