What do economists mean when they say ‘fiscal expansion’? Select one – the most appropriate answer.

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Question: What do economists mean when they say ‘fiscal expansion’? Select one – the most appropriate answer.

Option 1: Increase of government spending, cut in taxes, combination of both.
- This option aligns with the classical concept of fiscal expansion: boosting aggregate demand through higher government spending and/or lower taxes, which injects more money into the economy and stimulates output and employment. It captures the two common tools of expansionary fiscal policy: spending increases and tax reductions, or a mix of the two.

Option 2: Increase of government spending, increase in taxes, combination of both.
- Raising taxes while increasing government spending would have mixed effects, but the net impact on fiscal expansion is ambiguous and typically weaker in expansionary terms. Higher taxes reduce disposable income, which can dampen demand, offsetting the stimulative effect of higher spending. This is not the standard description of expansionary policy.

Option 3: Cut in government spending, increase in taxes, combination of both.
- A cut in spending reduces government demand directly, while higher taxes further depress household and business spending. This combination is generally considered contractionary rather than expansionary, making it inconsistent with the concept of fiscal expansion.

Option 4: No correct answer.
- Given that there is a widely accepted description of fiscal expansion involving higher spending, lower taxes, or a combination of the two, asserting that there is no correct answer ignores the conventional framework and would be incorrect.

Option 5: Decrease of government spending, cut in taxes, combination of both.
- Decreasing government spending is a contractionary measure; combined with tax cuts, the overall effect is not clear-cut expansionary, but the reduction in government spending pushes the stance toward contraction or at best a mixed stance. This does not match the standard notion of fiscal expansion.

In summary, option 1 correctly captures the essence of fiscal expansion by describing the main tools (increasing spending and/or cutting taxes, or a mix of both) that aim to stimulate aggregate demand, while the other options describe scenarios that are either neutral, contractionary, or ambiguously expansionary and therefore do not fit the standard definition.

econ_420_120255_249094 Lesson 14 Quiz

What do economists mean when they say ‘fiscal expansion’? Select one – the most appropriate answer.

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econ_420_120255_249094 Lesson 14 Quiz

What do economists mean when they say ‘fiscal expansion’? Select one – the most appropriate answer.

View Explanation

Log in for full answers

Similar Questions

Fiscal policy refers to the idea that changes in:

Consider the following graph. Suppose the economy is currently at a point like A. Assume the central bank in this economy remains idle. What type of policy can the Government conduct to reach point B?

______________ are changes in federal taxes and government purchases that are intended to achieve macroeconomic policy goals, and ______________ are changes in federal taxes and government spending that respond to the Business Cycle without direct government action.

Which of the following has been cited by economists as a drawback of fiscal policy in comparison to monetary policy?

Which of the following government fiscal policy actions would increase the public debt?

Country D faces rising unemployment after a banking crisis that undermined business confidence, while at the same time the Stability and Growth Pact holds. Which of the following best captures this country's policy circumstances?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

are changes in federal taxes and government purchases that are intended to achieve macroeconomic policy goals, and are changes in federal taxes and government spending that respond to the Business Cycle without direct government action.