Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased government spending without immediate revenue increases
B
Decreased consumer spending due to higher taxes
C
Lower interest rates leading to higher savings
D
Reduced investment from private sectors
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary fiscal policy involves the government increasing its spending or cutting taxes to boost economic activity. When the government spends more money than it collects in taxes, it needs to borrow to cover the difference, which leads to a budget deficit. For example, if a government decides to build new schools and spends a lot of money on construction, but does not increase taxes to match this spending, it may end up borrowing funds. This borrowing adds to the overall debt, making the budget deficit larger. Therefore, while expansionary fiscal policy can stimulate the economy, it often results in a higher budget deficit because of the increased spending without corresponding revenue.
Detailed Explanation
When the government spends more money, it can create a budget deficit. Other options are incorrect because Some might think that higher taxes will reduce spending; It's a common belief that lower interest rates mean people save more.
Key Concepts
Expansionary Fiscal Policy
Budget Deficit
Aggregate Demand
Topic
Expansionary Fiscal and Monetary Policies
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.