ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During expansionary periods, governments can increase spending on infrastructure projects, social programs, and other initiatives to boost demand and stimulate economic growth. They may also enact tax cuts to reduce taxes, which puts more money in consumers’ pockets and stimulates spending.

Detailed explanation-2: -Fiscal Multiplier is often seen as a way that spending can boost growth in the economy. This multiplier state that an increase in the government spending leads to an increase in some measures of economic wide output such as GDP.

Detailed explanation-3: -According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.

Detailed explanation-4: -Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment? The multiplier process will contribute to an additional increase in aggregate demand which will cause an inflationary gap.