Expansionary Fiscal Policy
Plain definition
Government policy that increases spending, cuts taxes, or both, to raise aggregate demand and fight recessions or high unemployment.
In economics
Expansionary fiscal policy injects demand directly: government purchases create jobs immediately, while tax cuts raise disposable income and consumption. Its strength depends on the spending and tax multipliers. Drawbacks include larger deficits, possible crowding out of private investment, and implementation lags.
Example
With unemployment at 10%, the government mails $1,200 checks to households and funds highway repairs. Households spend much of the checks, contractors hire workers, and each round of spending generates further income through the multiplier effect.
Expansionary fiscal policy is confused with expansionary monetary policy. Fiscal expansion means the government spends more or taxes less; monetary expansion means the central bank lowers rates or buys assets. Both fight recessions, but only fiscal policy directly puts money in specific people's hands.