6. When a government engages in an expansionary fiscal policy, it cuts government spending and raises...

6. When a government engages in an expansionary fiscal policy, it cuts government spending and raises taxes in order to reduce its budget deficit.

a. True

b. False

Solutions

Expert Solution

Correct answer is False.

When a government engages in an expansionary fiscal policy it increases government spending and reduces taxes rates in order to increase the aggregate demand of the economy.

Fiscal policy is the revenue and expenditure policy of the government. It is the measure to cope up with inflation or deflation situation in the country. The government engages in expansionary fiscal policy to increase the aggregate demand in order to fight with recession.

Expansionary fiscal policy includes measures taken to increase the aggregate demand.The government can taken following measures to increase aggregate demand-

Reducing tax rate.
Increasing government consumption expenditure
Reducing bank rate
Increasing government investment expenditure
Giving subsidies , etc.

As, AD = C + I + G +(X-M)

where, C = consumption, I = Investment, G = Government exp, X = export and M = imports

Goverment increases it expenditures on consumption and investment to increase aggregate demand. Also, it reduces the tax rates so that households can spend more of their income on consumption, hence increasing the aggregate demand.

On the contrary, It is contractionary fiscal policy in which government cuts its spending and raises taxes in order to reduce aggregate demand, hence reducing inflationery situation and budget deficit.

Hope it helps!

jeff jeffy answered 1 year ago

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