Expansionary fiscal policy increases income, which increases imports, and this in turn increases the size of the trade deficit.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy boosts domestic income by increasing government spending or cutting taxes, which leads to higher consumer spending, including on imports. As imports increase without a corresponding rise in exports, the trade deficit (the difference between exports and imports) widens.

Expansionary Fiscal Policy Increases Income, Which Increases Imports, and This