ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Expansionary fiscal policy is usually characterized by deficit spending. Deficit spending occurs when government expenditures exceed receipts from taxes and other sources. In practice, deficit spending tends to result from a combination of tax cuts and higher spending.

Detailed explanation-2: -Expansionary fiscal policy is defined as an increase in government expenditures and/or a decrease in taxes that causes the government’s budget deficit to increase or its budget surplus to decrease.

Detailed explanation-3: -Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending.

Detailed explanation-4: -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.

Detailed explanation-5: -How Does Deficit Spending in Fiscal Policy Work? When a government wants to stimulate the economy beyond the confines of its budget, it can elect to go into debt to make up the difference. The amount of annual government spending in excess of yearly government revenues makes up the fiscal deficit.