Boosting Economic Growth: An Overview of Expansionary Fiscal Policy’s Impacts on Employment, Spending, and Interest Rates

With an expansionary fiscal policy, what will most likely happen to the real gross domestic product (GDP) and the nominal interest rate in the short run?

Real GDP- increase Nominal Interest Rate- Increase

An expansionary fiscal policy involves increasing government spending or cutting taxes to stimulate economic growth.

In the short run, an expansionary fiscal policy is expected to increase the real GDP, as the increased government spending or tax cuts will lead to an increase in aggregate demand. This means that businesses will produce more goods and services to meet the increased demand for their products. This increased production will likely lead to an increase in employment, as companies will need to hire more workers to meet the increased demand.

With more people employed, this means that the purchasing power of consumers will increase, which will further stimulate economic growth. This can lead to a cycle of growth and increased prosperity.

On the other hand, expansionary fiscal policy may lead to an increase in the nominal interest rate, which is the interest rate before adjusting for inflation. This is because the increased government spending or tax cuts will increase the demand for goods and services, leading to higher prices, which in turn will lead to higher nominal interest rates.

While the nominal interest rates may increase, the real interest rate (which adjusts for inflation) may not necessarily increase. This is because inflation may also increase with the expansionary fiscal policy.

Overall, an expansionary fiscal policy is expected to boost economic growth in the short run, potentially leading to increased employment and consumer purchasing power, but may also lead to higher nominal interest rates.

More Answers: