Expansionary Fiscal

Policy & Overheated

Economy

Presented By :
Rehan Ahmad
Asad Raza
Sherjeel Ahmed
Expansionary policy

Expansionary Fiscal Policy :

An expansionary policy is a macroeconomic policy that
seeks ,
I. to expand the money supply.
II. to encourage economic growth or ,
III. combat inflationary price increases

Example of an expansionary fiscal policy :

The two major examples of expansionary fiscal policy are ,
I. Tax cuts and
II. Increased government spending.
Cont…
• The policy increases aggregate demand while contributing to
deficits or drawing down of budget surpluses.

• Expansionary fiscal policy affect aggregate demand ? How.

• Expansionary Fiscal Policy Lower taxes increase disposable
income of consumers leading to higher levels of consumer
spending.
which can also increase aggregate demand and could lead to
higher economic growth.

• Expansionary Fiscal policy can also lead to inflation because

of the higher demand in the economy.
Expansionary Fiscal Policy and
Government Borrowing
• Expansionary fiscal policy will lead to an increase in the size
of a government's budget deficit.
• This is a potential problem of expansionary fiscal policy.
Higher borrowing could:
• Cause markets to fear default and
• push up interest rates on government debt.
 Evaluation of Expansionary Fiscal Policy
• The impact of expansionary fiscal policy will depend on many
factors:

• What else is happening in the economy? E.g. US tried to cut taxes in

2008. In theory, this lower tax should boost spending. However, the
economy is experiencing falling house prices, lower confidence and
a shortage of credit; because of all these factors expansionary fiscal
policy is relatively ineffective

• Crowding Out
• Timing of Fiscal Policy
• Supply Side Effect
Is the fiscal policy effective/the
best policy to deal with
unemployment?
To give a very rough overview:
Keynesians say yes
• Fiscal policy can be
effective in reducing
unemployment. In a
recession, expansionary
fiscal policy will increase
AD, causing higher
output, leading to the
creation of more jobs.
Classical Economics
• Say no. Fiscal policy will
only cause a temporary
increase in real output.
In the long run,
expansionary fiscal
policy just causes
inflation and does not
increase real GDP.
Overheated economy…
• When a prolonged period of good economic growth and
activity causes high levels of inflation and inefficient supply
allocations as producers overproduce and create excess
production capacity in an attempt to capitalize on the high
levels of wealth.