Answer:
Economy's marginal propensity to save (MPS) is small.
Explanation:
Fiscal policy in economics refers to the use of government expenditures (spending) and revenues (taxation) in order to influence macroeconomic conditions such as Aggregate Demand (AD), inflation, and employment within a country. Fiscal policy is in relation to the Keynesian macroeconomic theory by John Maynard Keynes.
For instance, measuring the time between when a fiscal policy is implemented and when the people feel its impact in the society refers to a lag.
A fiscal policy affects combined demand through changes in government policies, spending and taxation which eventually impacts employment and standard of living plus consumer spending and investment. Monetary policy affects the money supply in an economy, which then creates an impact on interest rates and the inflation rate.
Basically, an expansionary fiscal policy comprises of rebates, transfer payments, tax cuts, as well as an increase in government spending on the improvement of infrastructure and other public projects.
Hence, if a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the Economy's marginal propensity to save (MPS) is small.
