3.6

What type of economic problem, either inflation or recession, will expansionary fiscal policy help?

Expansionary fiscal policy

When a country is in a recession and the government uses expansionary fiscal policy to try to solve the recessionary problem of unemployment, explain how this can lead to a budget deficit (or overspending).

When a country is in a recession and the government uses the expansionary fiscal policy to try solve the recessionary problem of unemployment this can lead to a budget deficit. This is because increasing spending, and cutting taxes, leads to more spending, and increases output. This increased output requires more workers to produce goods and services, and so unemployment decreases. But increasing government spending and cutting taxes at the same time can lead to a budget deficit.

Contractionary fiscal policy has the goal of contracting the economy by ________________(increasing/decreasing) aggregate demand. The two tools are _______________ and/or ________________.

decreasing decreasing government spending increasing taxes

Expansionary fiscal policy has the goal of expanding the economy by (increasing/decreasing) ______ aggregate demand. The two tools are: _______________ and/or _________________.

increasing increasing government spending decreasing taxes

What type of economic problem, either inflation or recession, will contractionary fiscal policy help?

inflation.

What happens to the price level (PL), output (real GDP), and unemployment as a result of expansionary fiscal policy?

the price level (PL) will be higher, the output (real GDP) will be higher, and unemployment will be higher.

What happens to the price level (PL), output (real GDP), and unemployment as a result of contractionary fiscal policy?

the price level (PL) will be lower, the output (real GDP) will be lower, and unemployment will be lower.