University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 1

Expansionary fiscal policy typically involves increasing government spending and/or decreasing taxes to stimulate economic activity. One of the primary goals of this policy is to increase aggregate demand, which can stimulate growth and potentially lower unemployment rates. When the government increases its spending, it directly injects money into the economy, creating jobs and encouraging consumer spending. This increased demand for goods and services often leads to lower unemployment rates as businesses hire more workers to meet the demand.

However, this increase in demand can also lead to rising inflation rates. When more money is circulating in the economy, and if the supply of goods and services doesn’t increase correspondingly, prices tend to rise. Thus, expansionary fiscal policy can create upward pressure on prices, resulting in increased inflation rates.

Therefore, the consequence of expansionary fiscal policy indeed often includes both lower unemployment rates due to heightened economic activity and increased inflation rates as more money chases the same amount of goods and services. This comprehensive understanding of the effects of expansionary fiscal policy reinforces the selection of both outcomes as potential consequences.