Which of the following most clearly indicates that fiscal policy is becoming more expansionary?
A) An increase in the budget deficit relative to GDP
B) A reduction in the budget deficit relative to GDP
C) An increase in the budget surplus relative to GDP
D) An increase in the nominal (dollar) size of the budget deficit

Question

Quizplus · Accepted Answer

Fiscal policy becomes more expansionary when there is an increase in the budget deficit relative to GDP. This means that the government is spending more than it is taking in, which can stimulate economic growth by increasing demand for goods and services. A reduction in the budget deficit (choice B) or an increase in the budget surplus (choice C) would indicate more contractionary fiscal policy, as the government is either spending less or collecting more revenue. The nominal size of the budget deficit (choice D) does not provide information about whether fiscal policy is becoming more expansionary or contractionary, as it only relates to the actual dollar amount of the deficit, not its relative size to the overall economy.

Which of the Following Most Clearly Indicates That Fiscal Policy