Question

What are the tools of expansionary fiscal policy?

Answer 1

Fiscal policy is mainly controlled by the government. The tools of expansionery fiscal policy include: 1. A cut in income taxes. This will increase the disposable income of people and so increase spending in the economy. This is one way in which the economy can be stimulated. 2. An increase in government spoedning. This will cause the IS curve to shift rightwards and this will cause an increase in output and interest rates. A part of the increase in output in such cases will be crowded out. 3. An increase in transfer payments. This is a transfer that the government makes that will help people increase their spending power. This is increased as part of an expansionery fiscal policy.