Expansionary Fiscal Policy
Definition
Expansionary fiscal policy refers to government actions aimed at increasing aggregate demand and stimulating economic growth during periods of recession or low economic activity. It involves increasing government spending, reducing taxes, or both.
Analogy
Think of expansionary fiscal policy as giving your friend some extra money during tough times so they can spend more on things they need. By injecting more money into the economy through increased government spending or tax cuts, it helps boost overall economic activity.
Related terms
Aggregate Demand (AD): Aggregate demand represents the total amount of goods and services that all individuals, businesses, and governments are willing to buy at different price levels within an economy.
Multiplier Effect: The multiplier effect refers to the idea that an initial increase in spending, such as through expansionary fiscal policy, can lead to a larger increase in overall economic output. It shows how changes in spending can have a ripple effect throughout the economy.
Automatic Stabilizers: Automatic stabilizers are government programs or policies that automatically adjust taxes and transfer payments based on the state of the economy. They help stabilize aggregate demand without requiring explicit action from policymakers.
"Expansionary Fiscal Policy" appears in:
Study guides (6)
AP Macroeconomics - 2.2 Limitations of GDP
AP Macroeconomics - 2.3 Unemployment
AP Macroeconomics - 3.8 Fiscal Policy
AP Macroeconomics - 5.1 Fiscal and Monetary Policy Actions in the Short-Run
AP Macroeconomics - 5.5 Crowding Out
AP Macroeconomics - 6.4 Effect of Changes in Policies & Economic Conditions on the Foreign Exchange Market
Additional resources (1)
Practice Questions (7)
- Which of the following is an example of expansionary fiscal policy?
- Which of the following is a direct impact of expansionary fiscal policy?
- Which of the following best describes the purpose of expansionary fiscal policy?
- What is the likely short-term effect of expansionary fiscal policy on real GDP and the price level?
- How does the government implement expansionary fiscal policy?
- What can happen to expansionary fiscal policy measures when crowding out occurs?
- When a country practices an expansionary fiscal policy, what effect does it have on the exchange rate for that country's currency?
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