Answer to Question #63706 in Macroeconomics for rakib

Question

Use IS-LM and AD-AS framework to explain -
How does an expansionary fiscal policy works in keynesian model? how does the classical school explain this?

Answer 1

pansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.
Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand, and decreasing spending & increasing taxes after the economic boom begins. Keynesians argue this method be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment.
Some classical and neoclassical economists argue that crowding out completely negates any fiscal stimulus. In the classical view, the expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income.