AP MacroeconomicsFiscal Policy
Expansionary Fiscal Policy
Expansionary fiscal policy is an increase in government spending or a cut in taxes used to boost aggregate demand in a recession.
It shifts aggregate demand right, raising real GDP and lowering unemployment, often at the cost of higher prices and a larger budget deficit. It is most appropriate during a recessionary gap. Its impact can be weakened by crowding out and time lags.
Formula / Example
ΔAD = Δgovernment spending × [1 ÷ (1 − MPC)].
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