Which of the following represents expansionary fiscal policy?

Question

BlackTom AI · Accepted Answer

Expansionary fiscal policy increases aggregate demand by raising government purchases or cutting taxes, thereby shifting the aggregate demand curve to the right and stimulating output and employment.

1) Relevant knowledge points and concepts
- Aggregate demand (AD) in a closed economy: AD = C + I + G. G is government spending. 
- Expansionary fiscal policy: actions that increase AD (e.g., increase G, reduce taxes, increase transfers). 
- Fiscal multiplier: ΔY = (1 / (1 − MPC)) × ΔG, where MPC is the marginal propensity to consume. Used to quantify the total change in output from a change in government spending.

2) Step-by-step reasoning
- Starting at an equilibrium output Y0, the government increases spending (ΔG > 0).
- Directly, G rises, so AD rises by ΔG.
- Households receive income from increased output and spend a portion (MPC), producing additional rounds of consumption increases.
- The fiscal multiplier magnifies the initial ΔG into a larger ΔY.

3) Example calculation (intermediate steps)
- Suppose MPC = 0.8. Multiplier = 1 / (1 − 0.8) = 1 / 0.2 = 5.
- If government spending increases by ΔG = $10 billion, then ΔY = 5 × $10 billion = $50 billion.
- This shows how an increase in G yields a multiplied increase in national income.

4) Why the correct answer is correct
- An increase in government spending directly raises G in the AD identity and triggers the multiplier process, increasing aggregate demand and output — the hallmark of expansionary fiscal policy.

5) Why other typical choices would be incorrect or different
- Increasing taxes or decreasing government spending are contractionary (they reduce AD). 
- Tax cuts or higher transfer payments would also be expansionary (so they would be correct expansionary tools), but pure choices like “increase taxes” or “decrease G” would be incorrect for expansionary policy.

6) Conclusion
- Therefore, “An increase in government spending” is an expansionary fiscal policy, which matches the provided correct answer.

Which of the following represents expansionary fiscal policy?单项选择题

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