What is the primary difference between expansionary and contractionary fiscal policy?

Expansionary fiscal policy is primarily aimed at stimulating economic activity during periods of recession or economic downturns. This is achieved by increasing government spending or decreasing taxes, which boosts overall demand in the economy. By enhancing aggregate demand, expansionary fiscal measures can promote job creation and economic growth, which are critical during challenging economic conditions.

In contrast, contractionary fiscal policy is employed when an economy is overheating, typically characterized by high inflation. This type of policy reduces government spending or increases taxes, thus decreasing overall demand. The goal of contractionary policies is to slow down the economy to maintain price stability and curb inflationary pressures.

The distinction lies in the objectives and outcomes of the two policies: expansionary policies seek to inject funds into the economy to foster growth, while contractionary policies aim to withdraw funds to stabilize the economy.