Question

Which of the following would be an example or result of expansionary fiscal policy in action?

A. an increase in taxation
B. a decrease in government purchases
C. a budget deficit
D. a decrease in transfer payments
E. a budget surplus

Answer 1

A budget deficit is an example of expansionary fiscal policy, which aims to increase aggregate demand, typically leading to the government spending more than it collects in revenue.

Step-by-step explanation:

An example or result of expansionary fiscal policy in action would be a budget deficit (C). Expansionary fiscal policy aims to increase the level of aggregate demand through measures such as an increase in government spending and a reduction in taxes. This often leads to a budget deficit because the government is spending more money than it collects in revenue. Unlike options A, B, D, and E, which either do not affect aggregate demand or represent a contractionary approach, a budget deficit typically reflects the borrowing necessary to finance expansionary measures. In the context of a recession, expansionary fiscal policy is most appropriate because it stimulates economic growth and reduces unemployment.

During times of economic recession, it is essential to use fiscal policy to lift the economy. An aggregate demand/aggregate supply model would show an outward shift in the aggregate demand curve resulting from the increase in government spending or the decrease in taxes.