Answer to Question #106931 in Macroeconomics for Alina

Question

What could be expected should government plan to apply an expansionary fiscal policy?

Answer 1

Expansionary fiscal policy - This a type of fiscal policy that entails decreasing tax rates and increasing government expenditures. Usually, the objective of expansionary fiscal policy is to combat recessionary pressures.

When tax rates are low, it means that individuals or households have more disposal income, which they can spend to acquire their needs. Additionally, a reduction in taxes creates a positive business environment, which increases investor confidence and leads to an increase in private investment - a component of GDP. Furthermore, when the government increases its expenditure, it directly impacts on the GDP positively.

Therefore, if the government applies an expansionary fiscal policy, it should expect an increase in the country’s gross domestic product (GDP).