Question

What actions can the government take if it has an expansionary fiscal policy? How do these actions help to increase employment?

Answer 1

An expansionary fiscal policy seeks to promote economic growth by cutting down taxes or increasing government spending. By cutting down taxes the policy hopes to estimulate people in spending more on goods, making businesses grow and generate more employment, or to make businesses grow by letting it spend less on taxes. By increasing government spending the policy creates new jobs, for example in construction, and so creates employment, the government can also increase spendings on funding of businessess, helping them grow.

Answer 2

This type of policy is usually related to the concept of fiscal deficit. As the amount of public spending is greater than the main amount of taxes collected, the budget deficit increases. In other words, more money is spent on public services than on taxes. The government may resort to an increase in the public deficit, when seeking to increase aggregate demand

The increase in aggregate demand would consist of increases in production with the rise in the amount of public expenditure. A decrease in unemployment is pursued thanks to reductions in the most common taxes, and therefore other results are also achieved such as a greater consumption of goods and services and an increase in terms of investment by companies.