Final answer:
Expansionary fiscal policy is most appropriate when an economy is in a recession, aiming to stimulate economic growth by increasing aggregate demand through government spending or tax reductions.
Step-by-step explanation:
Expansionary fiscal policy is a tool used by governments to stimulate the economy by increasing aggregate demand. This can be done through two main mechanisms: increasing government spending or reducing taxes. When an economy is in a recession, characterized by decreased economic activity, increased unemployment, and producing below its potential gross domestic product (GDP), an expansionary fiscal policy is considered most appropriate. This approach aims to encourage economic growth by putting more money into consumers' and businesses' hands, which can lead to increased spending and investment.
In contrast, a contractionary fiscal policy is often implemented when the economy is producing above its potential GDP, which might lead to high inflation. This involves decreasing government spending or increasing taxes to reduce aggregate demand, thereby cooling down the economy and controlling inflation. Keynesian macroeconomics supports the use of expansionary fiscal policy to fight a recession by shifting the aggregate demand curve to the right, which in turn, stimulates output and decreases unemployment.