Question

Why is government action that increases the deficit an expansionary fiscal policy? Government expansionary fiscal policy includes
A. decreasing inventories, which increases the deficit.
B. increasing taxes, which increases the deficit.
C. increasing the interest rate, which increases the deficit.
D. increasing government spending, which increases the deficit.

Answer 1

Answer:

The answers are:

1) Expansionary fiscal policy: government policy that seeks to increase aggregate demand through higher government spending and/or lower taxes.

The government's deficit is increased by:

• Increasing government spending; the government will spend more money than what it collects in taxes.
• By lowering taxes; even if the government spending remains unchanged, if taxes are lowered the budget deficit will increase.

So any possible action that increases the deficit, will be considered an expansionary fiscal policy.

2) Government expansionary fiscal policy includes: D) increasing government spending, which increases the deficit.