Under a fixed exchange rate regime, an expansionary fiscal policy would raise interest rates and GDP, which would cause downward (appreciation) pressure on the exchange rate, forcing the monetary authority to undertake a(n) expansionary monetary policy.
What is expansionary?
A type of macroeconomic policy known as expansionary, or loose policy, aims to promote economic growth. Monetary policy or fiscal policy are both examples of expansionary policy (or a combination of the two).
Inflation is managed through contractionary policy. When the government cuts tax rates while increasing expenditure to spur economic growth, it is said to be implementing an expansionary fiscal policy. As a result, consumption rises due to an increase in purchasing power.
Tax reductions and an increase in government expenditure are two instances of expansionary fiscal policy. Expansionary fiscal policy is employed to stop or avert recessions as well as to lower unemployment rates.
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