explain the working of an expansionary fiscal policy.

Expert Solution

A Fiscal policy means government adjusts its spendings and level of taxe rates to influence and monitor a nation's economy. There are three types of fiscal policy viz neutral policy,expansionary policy and contractionary policy. An expansionary fiscal policy is used by the government to kick start the economy during a recession. This policy is used during recession to build a foundation for strong economic growth and increase employment in the economy.

In an expansionary fiscal policy,the government more money than it collects through taxes.In this policy government increases spending or reduces taxes or uses a combination of both.In this way,it will boost aggregrate demand which in turn increases output and employment. Since government spending is one of the aggregrate demand,an increase in which will shift the demand curve to the right. Also decrease in taxes will increase disposable income of the consumers,encouraging consumption or saving,resulting in shift of aggregrate demand curve to the right.An increase in aggregrate demand curve will in turn increase in real GDP ,resulting in rise in prices.

The following graph shows how expansionary policy works

Rahul Sunny answered 2 years ago

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