Expansionary fiscal policy is used by the government when attempting to balance out the contraction phase of the business cycle (especially when in or … Show what this means in the i-M graph and then explain what type of macro policy will not work. a. Decrease in deficit indicates expansionary fiscal policy An increase in surplus indicates that the increase in tax revenue is more than the increase in spending, which indicates contraction. It also causes an increase in the demand for foreign bonds. This fiscal expansion is often financed through borrowed funds that will need to be paid back. Expansionary policy is a type of macroeconomic policy that is implemented to stimulate the economy and promote economic growth. Expansionary fiscal policy is, simply put, when a government starts spending more, or taxing less. Expansionary fiscal policy is used to kick-start the economy during a recession. There is a liquidity trap in the i-M space graph. What, if anything, does expansionary fiscal policy do in the i-M space graph, cet. Congress uses it to end the contraction phase of the business cycle when voters are clamoring for relief from a recession. Expansionary Fiscal Policy. The philosophical standpoint behind expansionary fiscal policy is the idea that it is the duty of government to take an active role in the national economy, particularly in times of recession, to dampen the negative impact and shorten the length of … There are two types of expansionary policies – fiscal and monetary. Indicate the disequilibrium that is created at the initial interest rate and explain what will happen and why. Explain. It boosts aggregate demand, which in turn increases output and employment in the economy. There are two types of fiscal policy. Figure 2. Expansionary Fiscal Policy. Expansionary Fiscal Policy An increase in government purchases, decrease in net taxes, aimed to increase aggregate demand enough to reduce unemployment back to equilibrium Automatic Stabilizers It is generally adopted during low economic growth phases. Whether the government is … In pursuing expansionary policy, the government increases spending, reduces taxes, or does a combination of the two. Expansionary fiscal policy is the use of government spending, taxation and transfer payments to stimulate aggregate demand. Expansionary fiscal policy is used to provide a temporary boost to a lagging economy to increase consumption and investment to pre-recession levels. The government either spends more, cuts taxes, or both. The original equilibrium (E 0) represents a recession, occurring at a quantity of output (Y 0) below potential GDP.However, a shift of aggregate demand from AD 0 to AD 1, enacted through an expansionary fiscal policy, can move the economy to a new equilibrium output of E 1 at the level of potential GDP which is shown by the LRAS curve. par.? Even though the fiscal deficit provides some indication about the direction of fiscal policy, it may not indicate the true intention of the government with respect to its fiscal policy. The most widely-used is expansionary, which stimulates economic growth. b. Expansionary monetary policy focuses on increased money supply, while expansionary fiscal policy revolves around increased investment by the government into the economy. Expansionary fiscal policy is an economic policy of government spending that aims to stimulate the economy even in the event of a budget deficit. 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