An expansionary fiscal policy:
A)in the presence of a budget deficit would decrease the government debt.
B)would shift AD to the right and increase the government budget deficit.
C)would shift AD to the left and decrease the government budget deficit.
D)would not be effective in the presence of a budget surplus.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy involves increases in government spending and/or reductions in taxes, which would shift the aggregate demand (AD) curve to the right, leading to higher output and employment levels. However, this policy also means that the government would have to borrow more money to finance its spending, increasing the budget deficit. Therefore, choice B correctly states that an expansionary fiscal policy would shift AD to the right and increase the government budget deficit. Choice A is incorrect because an expansionary fiscal policy would increase the government debt (the total stock of outstanding loans and bond issuances), while the budget deficit is the annual shortfall of government revenues below expenditures. Choice C is incorrect because a contractionary fiscal policy (opposite of expansionary) would shift AD to the left and decrease the government budget deficit. Choice D is incorrect because a budget surplus means that the government is collecting more revenues than spending, so an expansionary fiscal policy would not be needed or feasible in this scenario.

An Expansionary Fiscal Policy