Answer to Question #205826 in Finance for Bradman

Question

1. Consider the expenditure definition of GDP:

Y=C+I+G+NX

Can we conclude from the above identity that an expansionary fiscal policy will always lead to increase in GDP? Explain (with diagrams) (Assume Investment is fixed)

Answer 1

Y=C+I+G+NX

Expansionary fiscal policy will always lead to increase in GDP because the policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers.