What characterizes expansionary fiscal policy?

Expansionary fiscal policy is characterized by measures that stimulate economic activity, typically through increasing aggregate demand. This is commonly achieved by either increasing government spending or decreasing taxes.

Increasing government spending injects money directly into the economy, as it finances various public projects and services that create jobs and boost consumption. This additional expenditure can drive demand for goods and services, consequently encouraging businesses to expand and hire more employees, which further contributes to economic growth.

On the other hand, decreasing taxes puts more disposable income into the hands of consumers and businesses. With lower tax burdens, individuals can spend or invest more, and businesses can reinvest in their operations, both of which can lead to increased demand and economic growth.

In contrast, the incorrect choices involve actions that would typically be associated with contractionary fiscal policy or monetary policy measures, which aim to cool down an overheating economy or manage inflation. Therefore, the focus on either lowering government interventions (by decreasing spending or increasing taxes) or modifying the money supply (to adjust interest rates) does not align with the principles of expansionary fiscal policy.