Expansionary fiscal policy contains tax cuts, transfer payments and expanded government spending on projects such as infrastructure advancements.
Expansionary fiscal policy is most suitable when an economy is in slump and growing below its potential GDP.However, expansionary fiscal policy can result in increasing interest rates, growing trade debts, and accelerating inflation, particularly if applied during beneficial economic developments.
These side impacts from expansionary fiscal policy tend to partly offset its stimulative effects. It seeks to spur economic activity by arranging more money into the hands of consumers and businesses. It's one of the major forms governments reply to compacting in the business cycle and prevent economic recessions.
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