ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An expansionary fiscal policy leads to higher budget deficits while a contractionary policy reduces deficits.

Detailed explanation-2: -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-3: -Expansionary fiscal policy tools include increasing government spending, decreasing taxes, or increasing government transfers. Doing any of these things will increase aggregate demand, leading to a higher output, higher employment, and a higher price level.

Detailed explanation-4: -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-5: -The term government deficit implies increase in the debt of the government. In other words, if the government continues to borrow to finance deficit, it leads to additional debt.