What is the affect of expansionary fiscal policy on the economy?

Expansionary fiscal policy is the increase of government expenditure and/or the reduction of taxation. Government expenditure is an injection into the circular flow of income, whereas taxation is a leakage. Hence, expansionary fiscal policy would shift aggregate demand (AD) to the right. The size of this shift depends on the size of the stimulus as well as the size of the multiplier. The multiplier is calculated as 1 divided by the marginal propensity to withdraw. A rightward shift of aggregate demand leads to a extension along the long run aggregate supply (LRAS) curve, resulting in an increase in real GDP, and an increase to the price level. The impact on real GDP and the price level depends on the size of the shift in aggregate demand, and the position of AD on the LRAS curve. When the economy is close to full employment, expansionary fiscal policy results in a relatively small increase in real GDP, and a relatively large increase in the price level. If the expansionary fiscal policy comprises of investment or lower taxation, the LRAS curve could shift to the right in the long run. This would result in a greater increase in real GDP, and a smaller increase in the price level.