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: -A potential problem of expansionary fiscal policy is that it will lead to an increase in the size of a government’s budget deficit. Higher borrowing could: Financial crowding out. Larger deficits could cause markets to fear debt default and push up interest rates on government debt.

Detailed explanation-4: -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-5: -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.