An effective expansionary ﬁscal policy will
A) reduce a cyclical deﬁcit but necessarily increase the actual deﬁcit.
B) reduce the cyclically adjusted deﬁcit.
C) increase the cyclically adjusted deﬁcit but reduce the actual deﬁcit.
D) always result in a balanced actual budget once full employment is achieved.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves increased government spending or decreased taxes, is designed to stimulate economic growth. This typically leads to an increase in the cyclically adjusted deficit (which reflects the deficit adjusted for the effects of the economic cycle) because it implies higher spending or lower revenues independent of the economic cycle. However, by stimulating economic activity, it can reduce the actual deficit in the short term by increasing tax revenues through higher economic activity, though this effect on the actual deficit can vary based on the economic context and the scale of the stimulus.

An Effective Expansionary ﬁScal Policy Will