How can expansionary fiscal policy boost output and jobs in an economy?



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Posted on (Answer #1)

An expansionary fiscal policy can boost output and jobs in an economy by increasing aggregate demand.

Expansionary fiscal policy consists of one or both of two things.  These are tax cuts and increases in government spending.  The idea behind these policies is that both of them end up putting more money in the hands of consumers.  Tax cuts increase the amount of money that people get to keep from their earnings and government expenditures are paid out to individuals who then have more money. 

When consumers have more money in their hands, they are likely to spend more.  When they spend more, aggregate demand will rise.  When aggregate demand rises, so will economic output.  This will mean that more jobs will be available.

Let us examine how this works.  If everyone in the country has more money to spend, they buy more things.  If more things are bought, then more things must be produced.  This means that economic output will rise.  If more things must be produced, it will be necessary for more people to be hired so that they can produce the extra goods and services that are needed.  Thus, more jobs are created.

In these ways, expansionary fiscal policy increases output and job growth by increasing aggregate demand.

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