Which of the following effects of expansionary government spending would policymakers most want to avoid?

• A. A significant increase in inflation
• B. A decrease in unemployment
• C. A rise in economic growth
• D. An increase in aggregate demand

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the context of expansionary government spending, which is a fiscal policy tool used to stimulate economic activity by increasing government expenditures.
2. Step 2: Recognize the typical effects of expansionary government spending: it tends to increase aggregate demand, which can lead to higher economic growth and lower unemployment.
3. Step 3: Identify that while increased aggregate demand and economic growth are generally positive outcomes, they can also lead to higher inflation if the economy is near or at full capacity.
4. Step 4: Analyze why policymakers would want to avoid a significant increase in inflation, as high inflation can erode purchasing power, create uncertainty, and destabilize the economy.
5. Step 5: Conclude that among the listed effects, a significant increase in inflation is the undesirable outcome policymakers most want to avoid when implementing expansionary government spending.