ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Summary. Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP.

Detailed explanation-2: -The total accumulated amount that the government has borrowed and not yet paid back over time. If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used? expansionary. received more in taxes than it spent in that year.

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: -During a recession, if a government uses an expansionary fiscal policy to increase GDP, the: aggregate demand curve will shift to the right. When inflation begins to climb to unacceptable levels in the economy, the government should: use contractionary fiscal policy to shift aggregate demand to the left.

Detailed explanation-5: -A contractionary fiscal policy means a rise in taxes and a decrease in government expenditure. This causes aggregate demand which means a fall in prices. The decreased demand also leads to a decrease in the real GDP.