Which of the following typically occurs with expansionary fiscal policy?

• A. A reduction in the money supply
• B. An increase in government spending or a decrease in taxes
• C. An increase in interest rates due to central bank tightening
• D. A decrease in government spending and an increase in taxes

Answer: (B)

Verified step by step guidance

1. Step 1: Understand what expansionary fiscal policy means. It involves government actions aimed at stimulating economic growth, typically through increasing government spending or decreasing taxes.
2. Step 2: Recognize that expansionary fiscal policy is designed to increase aggregate demand by putting more money into the hands of consumers and businesses.
3. Step 3: Analyze each option given: a reduction in the money supply is usually related to monetary policy, not fiscal policy; an increase in interest rates due to central bank tightening is a monetary policy action, not a direct result of fiscal policy.
4. Step 4: Note that a decrease in government spending and an increase in taxes is actually contractionary fiscal policy, which aims to slow down the economy.
5. Step 5: Conclude that the typical effect of expansionary fiscal policy is an increase in government spending or a decrease in taxes, which directly injects demand into the economy.