Which policy action is expansionary fiscal policy?

Which policy action is expansionary fiscal policy?

• A. Increases AD by increasing government purchases, decreasing taxes, or increasing transfers.
• B. Decreases AD by decreasing government purchases, decreasing taxes, or decreasing transfers.
• C. Maintains AD by keeping spending and taxes constant.
• D. Reduces money supply to curb inflation.

Answer: (A)

Expansionary fiscal policy aims to boost overall demand in the economy. It does this by putting more money into the hands of households and firms or by increasing government activity. When government purchases rise, or taxes fall, or transfers rise, aggregate demand increases because there is more spending power or direct government demand for goods and services. That shift to the right in the aggregate-demand curve typically raises output and employment in the short run. So the action described—raising government purchases, cutting taxes, or increasing transfers—fits expansionary fiscal policy best. In contrast, reducing government purchases or transfers, or raising taxes, would dampen demand (contractionary). Keeping spending and taxes the same would leave demand unchanged, and reducing the money supply is a monetary policy tool, not fiscal policy.

Expansionary fiscal policy aims to boost overall demand in the economy. It does this by putting more money into the hands of households and firms or by increasing government activity. When government purchases rise, or taxes fall, or transfers rise, aggregate demand increases because there is more spending power or direct government demand for goods and services. That shift to the right in the aggregate-demand curve typically raises output and employment in the short run.

So the action described—raising government purchases, cutting taxes, or increasing transfers—fits expansionary fiscal policy best. In contrast, reducing government purchases or transfers, or raising taxes, would dampen demand (contractionary). Keeping spending and taxes the same would leave demand unchanged, and reducing the money supply is a monetary policy tool, not fiscal policy.