where expansionary fiscal policy involves spending deficits contractionary fiscal policy is characterized by budget surpluses this policy is rarely used however as it is hugely unpopular politically 
public policymakers thus face differing incentives relating to whether to engage in expansionary or contractionary fiscal policy therefore the preferred tool for reining in unsustainable growth is usually a contractionary monetary policy monetary policy involves the federal reserve raising interest rates and restraining the supply of money and credit in order to rein in inflation the two major fiscal policy tools that the u s government uses to influence the nation s economic activity are tax rates and government spending downside of expansionary policymounting deficits are among the complaints lodged against expansionary fiscal policy critics complain that a flood of government red ink can weigh on growth and eventually create the need for damaging austerity many economists simply dispute the effectiveness of expansionary fiscal policies they argue that government spending too easily crowds out investment by the private sector expansionary policy is also popular to a dangerous degree say some economists fiscal stimulus is politically difficult to reverse whether it has the desired macroeconomic effects or not voters like low taxes and public spending due to the political incentives faced by policymakers there tends to be a consistent bias toward engaging in more or less constant deficit spending that can be in part rationalized as good for the economy eventually economic expansion can get out of hand rising wages lead to inflation and asset bubbles begin to form high inflation and the risk of widespread defaults when debt bubbles burst can badly damage the economy this risk in turn leads governments or their central banks to reverse course and attempt to contract the economy fiscal policy vs monetary policyfiscal policy is the responsibility of the government it involves spurring or slowing economic activity using taxes and government spending monetary policy is the domain of the u s federal reserve board and refers to actions taken to increase or decrease liquidity through the nation s money supply according to the federal reserve board these actions are intended to promote maximum employment stable prices and moderate long term interest rates the economic goals the congress has instructed the federal reserve to pursue 3the monetary policy tools that the fed uses to increase or decrease liquidity and affect consumer spending and borrowing include 4who handles fiscal policy in the united states fiscal policy is directed by both the executive and legislative branches in the executive branch the president is advised by both the secretary of the treasury and the council of economic advisers in the legislative branch the u s congress authorizes taxes passes laws and appropriations spending for any fiscal policy measures through its power of the purse this process involves participation deliberation and approval from both the house of representatives and the senate 