ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Fiscal policy is another macroeconomic policy tool for adjusting aggregate demand by using either government spending or taxation policy. Expansionary fiscal policy increases the level of aggregate demand, through either increases in government spending or reductions in tax rates.

Detailed explanation-2: -Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.

Detailed explanation-3: -Which of the following is a reason a government might increase government spending? It is concerned that the unemployment rate is too high.

Detailed explanation-4: -There are three types of fiscal policy. They are neutral policy, expansionary policy, and contractionary policy.

Detailed explanation-5: -First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.