What three specific policy stances would constitute a fiscally expansionary plan?
The correct answer and explanation is:
A fiscally expansionary plan is typically designed to stimulate economic growth, increase aggregate demand, and reduce unemployment. Three specific policy stances that would constitute a fiscally expansionary plan are:
- Increased Government Spending: Governments can boost spending on infrastructure projects, public services, and other essential sectors. This raises demand for goods and services, leading to increased employment, higher income levels, and greater economic activity. Increased government spending directly influences aggregate demand in the economy and can help jump-start growth, especially in times of economic downturn or recession.
- Tax Cuts: Lowering taxes for individuals and businesses increases disposable income and boosts consumption. Individuals have more money to spend, and businesses have more capital to invest in expansion or hire more workers. Tax cuts increase the purchasing power of consumers and the investment capacity of firms, which stimulates demand in the economy and can lead to economic growth. Tax cuts aimed at low and middle-income earners are often most effective at boosting consumption, as they are more likely to spend the additional income.
- Increased Transfer Payments: Expansionary fiscal policies often include increasing government transfer payments such as unemployment benefits, social security, and welfare programs. These transfers support individuals and families, particularly during times of economic difficulty. By putting more money into the hands of consumers, it directly supports consumption and reduces the adverse effects of unemployment, leading to an overall increase in economic demand.
In a fiscally expansionary plan, these policies are meant to combat periods of economic slowdown or recession. By encouraging spending and investment, expansionary fiscal policy aims to boost overall economic output and reduce the unemployment rate. These measures are typically more effective in times of economic stagnation when interest rates are already low, and the economy is not responding adequately to monetary policy alone.