ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The most prominent risk associated with an expansionary policy is the risk of high inflation. Central banks have a target inflation level, which is considered ideal for steady inflation growth.

Detailed explanation-2: -When the government increases the amount of debt it issues during an expansionary fiscal policy, issuing bonds in the open market will end up competing with the private sector that may also need to issue bonds at the same time.

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: -Though popular, expansionary policy can involve significant costs and risks including macroeconomic, microeconomic, and political economy issues. Expansionary policy is directly related to the cause of inflation; though expansionary policies fight unemployment, it may unintentionally cause higher prices.

Detailed explanation-5: -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.