What is expansionary fiscal policy and what effect does it have?
Expansionary fiscal policy involves increasing aggregate demand (AD) by increasing government spending and decreasing taxation. Lower taxes will increase consumer disposable income which increases their spending. Due to the increase in aggregate demand, inflation will rise. Expansionary fiscal policy also increases short run economic growth due to increases in real GDP. It also causes a fall in unemployment, redistribution of income from the rich to the poor and an increase in spending on imports relative to exports.
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