What is the potential downside of expansionary fiscal policy?

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Question: What is the potential downside of expansionary fiscal policy?

Options:

Correct Answer: Higher inflation

Solution:

The potential downside of expansionary fiscal policy is higher inflation, as increased government spending can lead to demand outpacing supply.

What is the potential downside of expansionary fiscal policy?

What is the potential downside of expansionary fiscal policy?

Step 1: Understand what expansionary fiscal policy is. It means the government is spending more money or cutting taxes to boost the economy.
Step 2: Recognize that when the government spends more, it can increase demand for goods and services.
Step 3: Realize that if demand increases too much, it can outpace the supply of goods and services available.
Step 4: Know that when demand is higher than supply, prices tend to rise, leading to inflation.
Step 5: Conclude that the potential downside of expansionary fiscal policy is higher inflation due to increased demand.

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