CA Foundation · Business Economics · Business Cycles
During a deep recession, the government increases spending on roads and railways, financing it by borrowing, even though the budget deficit widens. This is an example of:
This is expansionary fiscal policy. The government raises its own spending, accepting a larger deficit, to lift aggregate demand, output and employment during a recession. It is fiscal rather than monetary because the tool is public expenditure, not central bank interest rates or reserve requirements.
- AContractionary fiscal policy
- BExpansionary fiscal policyCorrect
- CContractionary monetary policy
- DSelective credit control
Explanation
Higher government expenditure financed by borrowing raises aggregate demand and employment, which is expansionary fiscal policy. It is fiscal, not monetary, because it involves government spending and borrowing rather than central bank action. Contractionary policy would cut spending or raise taxes.
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