Question

In: Economics

Expansionary fiscal policy will do what to the government budget, assuming that was balanced at the...

Expansionary fiscal policy will do what to the government budget, assuming that was balanced at the start?

An increase in personal taxes

A decrease in government borrowing costs

A budget surplus

A budget deficit

Solutions

Expert Solution

Government Budget= Total Revenue– Total Expenditure.

Assuming that the government budget was balanced at the start such that the total revenue equalled total expenditure Intially.

An expansionary fiscal policy either takes the form of a tax cut in which the total revenue of the government decreases, or it may take the form of an increased government spending which increases the total expenditure, or it may take both forms reducing total revenue and increasing total expenditure. This makes the Government budget in the equation negative implying total revenue is less than total expenditure. This means that now there is budget deficit.

This means that the government budget will transform from a balanced one Intially to a budget deficit due to expansionary fiscal policy.

Therefore, assuming that at the start budget was balanced an expansionary fiscal policy will create a budget deficit.

Hence, fourth option is correct.


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