ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An expansionary fiscal policy lowers tax rates or increases spending to increase aggregate demand and fuel economic growth. A contractionary fiscal policy raises rates or cuts spending to prevent or reduce inflation.

Detailed explanation-2: -Expansionary fiscal policy is used to prevent or end recessions, or to prevent high unemployment. The Economic Stimulus Act of 2008 allowed the government to put money directly into consumers’ pockets in the hope of stimulating spending.

Detailed explanation-3: -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-4: -The Aggregate Demand/Aggregate Supply Model At the equilibrium (E0), a recession occurs and unemployment rises. In this case, expansionary fiscal policy using tax cuts or increases in government spending can shift aggregate demand to AD1, closer to the full-employment level of output.

Detailed explanation-5: -However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.