Answer to Question #90773 in Macroeconomics for Diana

Question

Which combination of policies would be the most expansionary?
A) an increase in government spending and taxes
B) a decrease in government spending and taxes
C) an increase in government spending and decrease in taxes
D)a decrease in government spending and an increase in taxes

Answer 1

C) an increase in government spending and decrease in taxes 

Expansionary policy generally aims at expanding the aggregate demand in order to accelerate the economic growth, increase employment and reduce unemployment. This is done through affecting the components of the aggregate demand which are the consumption expenditure, the investment expenditure, the government spending and the net exports (exports minus imports).

Increase in the government spending leads to the expansion of the economic activity through the multiplier effect and the higher rates of taxes, on the other hand, reduce the disposable income available for consumption and investment thus slowing down the pace of the economic growth. Therefore, an increase in government spending and reduction in taxes will cause the greater expansionary effect.