Question

During a recession and assuming Federal Reserve is 100% accommodating, expansionary fiscal policy will results in a growth in the nation's exports? or is it imports? Since this is fiscal policy, NOT monetary policy, I don't think change of money supply involving interest rate adjustments should be considered?

Answer 1

Expansionary fiscal policy increases government spending and/or decreases tax. Both actions increase aggregate demand, thus increasing real GDP and income.

Higher domestic income increases aggregate demand faster than domestic aggregate supply, so import demand increases.

However, accommodating monetary policy means in times of recession, Fed will increase money supply and decrease interest rate. This will increase investment, which also increases aggregate demand. So, if both expansionary fiscal policy and accommodating monetary policy are in effect, both will individually increase aggregate demand and imports.