To what extent does expansionary fiscal policy help governments achieve macroeconomic objectives?

Expansionary fiscal policy refers to when the government seeks to stimulate economic growth by increasing government spending and decreasing the level of taxation. We would then expect a higher level of disposable income, thus higher spending in the economy.This causes aggregate demand levels to rise and so, all other things being equal, we will observe higher real GDP levels, in other words, economic growth. This is likely to also lead to lower levels of unemployment, thus helping the government to achieve macroeconomic objectives.However, if the rise in AD is not matched by a rise in the Long Run Supply Curve, we will also observe a higher rate of inflation. As the Central Bank target rate is 2%, this may mean the government will prevent the economy from achieving this target.Further, a higher rate of inflation means domestic product got more expensive to prospective foreign buyers. This will lower the level of exports, leading to a deterioration in the current account balance (exports - imports).

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Answered by Rebecca S. Economics tutor

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