Final answer:
The Fed's accommodation of expansionary fiscal policy stimulates economic growth by increasing aggregate demand through government spending increases, tax reductions, and supportive monetary policy (e.g., keeping interest rates low). This leads to more investment and spending, which in turn boosts the economy's output, especially when it is below its potential GDP.
Step-by-step explanation:
When the Federal Reserve (often referred to as the Fed) accommodates an expansionary fiscal policy, which involves increases in government spending or reductions in taxes, the goal is to stimulate economic growth. The policy aims to increase the level of aggregate demand, thereby boosting production and reducing unemployment. If the economy is in a recession and producing below its potential Gross Domestic Product (GDP), such expansionary measures are considered appropriate.
When the Fed supports expansionary fiscal policy by keeping interest rates low (for example, through expansionary monetary policy such as buying bonds to increase the money supply), it helps to reduce the cost of borrowing. This can lead to more investment by businesses and more spending by consumers. The combined impact of increased investment and consumer spending, along with potentially higher government spending, shifts the aggregate demand curve to the right. The result is stimulated economic growth and a closing of the recessionary gap, rather than decreased inflation or reduced government spending.