Under the floating exchange rate system, the change of currency exchange rate is influenced by many factors, such as market supply and demand, international capital flow, etc., while small open economies are relatively vulnerable to the external economic environment. In this case, expansionary and contractive fiscal policies can be used as an effective tool to adjust economic fluctuations.

If there is a risk of economic downturn or recession, the government can adopt an expansionary fiscal policy by increasing expenditure and reducing taxes, thus stimulating economic growth and increasing employment opportunities. Expansionary fiscal policy often needs to increase the demand for loans and increase government bond issuance, which may also affect currency depreciation and inflation, so we should be alert to the limitation of timeliness.

On the contrary, if the economy continues to recover and there are risks such as overheating and inflation, the government can adopt a tight fiscal policy, reduce expenditure, increase taxes or adjust interest rates to reduce government borrowing, curb price increases, and maintain monetary stability and trade surplus. These measures have limited the phenomenon of excessive market volatility to a certain extent.

To sum up, expansionary fiscal policy can stimulate domestic economic growth, but we should be careful about the impact of currency depreciation and inflation on production and consumption. Tight fiscal policy may curb inflation to a higher level and provide good support for foreign exchange reserves.