Final answer:
Expansionary fiscal policy, involving increased government spending or reduced taxes, is used to combat recessions but often leads to higher deficits and national debt. Contractionary policy, with reduced spending or higher taxes, is applied when the economy is strong. The effectiveness of both policies is reduced when they are temporary.
Step-by-step explanation:
Expansionary and Contractionary Fiscal Policy
During a recession, expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic growth. This typically results in larger budget deficits and an increase in national debt. Once the economy recovers and grows well, a contractionary fiscal policy with budget surpluses, achieved by decreasing government spending or increasing taxes, is usually implemented to prevent overheating. However, the effectiveness of such policies is compromised when they are perceived as temporary rather than permanent measures. Additionally, structural economic changes take time, and fiscal policies face challenges such as interest rate effects, time lags, and political uncertainties.