Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Expansionary fiscal policy can lead to an increase in the budget deficit.
B
Lower interest rates from expansionary monetary policy can discourage borrowing.
C
Expansionary policies are typically employed to combat high inflation.
D
Increased government spending can stimulate aggregate demand in the economy.
E
Expansionary monetary policy can lead to higher levels of investment.
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary fiscal and monetary policies are tools used by governments and central banks to stimulate the economy, especially during times of recession. When a government increases its spending or cuts taxes, it puts more money into the hands of consumers and businesses, encouraging them to spend more. Similarly, when a central bank lowers interest rates or buys government bonds, it makes borrowing cheaper, which can lead to more investments and spending. For example, if a government builds new schools, it creates jobs and helps people earn income, which can then be spent on other goods and services, boosting the economy. Both policies aim to increase overall demand, which can help reduce unemployment and stimulate economic growth.
Detailed Explanation
All the statements provided misunderstand how expansionary policies work. Other options are incorrect because Some might think that increasing government spending always leads to a bigger budget deficit; It's a common belief that lower interest rates discourage borrowing.
Key Concepts
Expansionary Fiscal Policy
Expansionary Monetary Policy
Aggregate Demand
Topic
Expansionary Fiscal and Monetary Policies
Difficulty
medium level question
Cognitive Level
understand
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