Which of the following is an example of expansionary fiscal policy?
A. Buy Bonds
B. Lower Discount Rate
C. Sell Bonds
D. Lower reserve requirement
E. Increase government spending
Answer (2)
The correct example of expansionary fiscal policy is E. Increase government spending, as it directly boosts economic activity and aggregate demand. Other options either pertain to monetary policy or do not promote economic stimulus. Expansionary fiscal policy aims to enhance economic growth during downturns by increasing government expenditures.
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The question is asking about an example of expansionary fiscal policy. Fiscal policy refers to the use of government spending and taxation to influence the economy. Expansionary fiscal policy is used to stimulate economic growth, especially during a period of recession or economic slowdown. It aims to increase overall demand in the economy, thereby increasing production, reducing unemployment, and boosting purchasing power among consumers.
Among the given options, the correct choice is (E) Increase government spending .
Here's a breakdown of why this is the correct choice:
Increase Government Spending : This is a direct method of expansionary fiscal policy. When the government increases its spending on various projects like infrastructure, education, or healthcare, it injects more money into the economy. This leads to increased demand for goods and services, thereby encouraging businesses to hire more employees and increase production to meet the increased demand.
Why Others Are Not Correct :
(A) Buy Bonds : This refers to an action typically associated with monetary policy, not fiscal policy. When the central bank buys bonds, it increases the money supply but is not a part of fiscal policy.
(B) Lower Discount Rate : This is a monetary policy tool. By lowering the discount rate, the central bank makes borrowing cheaper for banks, which can lead to lower interest rates in the economy, but it's not fiscal policy.
(C) Sell Bonds : This is also related to monetary policy. Selling bonds takes money out of circulation, which can have a contractionary effect, opposite to what is desired in expansionary policy.
(D) Lower Reserve Requirement : This is another monetary policy tool. Lowering the reserve requirement allows banks to lend more money, but again, it is not part of fiscal policy.
In summary, the primary tool of expansionary fiscal policy is to increase government spending, thus making option (E) the correct choice.
