Question

Which of the following are expansionary fiscal policy actions? I. Reduction in Social Security withholding taxes II. Purchase of government bonds in the open market III. Increase in the corporate tax rate IV. Decrease in the personal tax rate

Answer 1

Answer:

I and IV are correct.

Explanation:

The reduction in the personal taxes and in the Social Security withholding taxes are considered as the expansionary fiscal policy. Fiscal policy refers to a policy that is used by the government for monitoring and influencing a nation's economy. Government adjust the expenditure, investment and taxes for maintaining the stability in an economy.

If there is a fall in level of tax rate then this will increase the disposal income of the consumers and hence, an increase in the aggregate demand. Therefore, there is a rightward shift in the aggregate demand curve.

Expansionary fiscal policies refers to the policies which increases the aggregate demand in an economy.