What is the primary goal of expansionary fiscal policy?

• A. To reduce government debt
• B. To stimulate aggregate demand
• C. To increase taxes
• D. To limit inflation

Answer: (B)

The primary goal of expansionary fiscal policy is to stimulate aggregate demand. This approach involves increasing government spending, reducing taxes, or a combination of both, to boost economic activity during periods of recession or economic slowdown. By implementing such measures, the government aims to increase the overall demand for goods and services, which can lead to higher production, more hiring, and ultimately economic growth.

When aggregate demand rises, it can help to close the output gap—essentially addressing the disparity between actual economic output and potential output. This policy is particularly effective when there is unused capacity in the economy or high unemployment, as it encourages businesses to ramp up production and hire more workers.

The other options focus on reducing government debt, increasing taxes, or limiting inflation, which are not the primary objectives of expansionary fiscal policy. Instead, they emphasize a more restrictive or conservative fiscal approach. In contrast, the goal of expansionary policies is explicitly to enhance economic performance through increased demand.