Brazil’s economy is facing a dilemma between expansionary and contractionary fiscal policy.
On one hand, its GDP growth is sluggish, rising by just 6.7% in the previous four years. The outgoing government officials adopted expansionary fiscal policy by cutting interest rates and letting rip on public spending to drive up GPA(with components of government purchase and investment).
On the other hand, the inflation rate is as high as 6.4% and since the predecessor took office,Interest rate is increased to cut demand for borrowing and goods, attempting to slower rise in general price level. In addition,to save Brazil’s investment grade credit rating, the government promises a budget surplus, and this leads to either cutting in government spending or increase in tax revenue, GDP growth is discouraged when these contractionary fiscal policies are adopted.
