A government increases spending on new roads and bridges during a period of recession. Which term best describes this type of fiscal policy?
Question 1 Report
A government increases spending on new roads and bridges during a period of recession. Which term best describes this type of fiscal policy?
Answer Details
The correct answer is Expansionary.
Expansionary fiscal policy involves increasing government spending, reducing taxation, or both, in order to stimulate aggregate demand and boost economic activity. During a recession, output and employment fall. By spending more on infrastructure such as roads and bridges, the government directly injects money into the economy, creating jobs and increasing demand for materials and services.
Supply-side policy focuses on improving the productive capacity of the economy (for example, through education or deregulation), not on short-term demand stimulus. Monetary policy involves changes to interest rates or the money supply by the central bank, not government spending decisions. Contractionary fiscal policy involves reducing spending or increasing taxes to slow down an overheating economy, which is the opposite of what is described here.
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