WHY DOES EXPANSIONARY FISCAL POLICY INCREASE THE MONEY SUPPLY?

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The most likely way for this to happen is for people to save some of the money that they get as part of the expansionary fiscal policy.

Fiscal policy on its own does not increase the money supply (unless the government just prints money to provide the new spending).  However, if the people take their tax cut (or the money they get from the increased government spending) and save it, the money supply can increase.

The way that happens is through the multiplier effect.  People save some of their money.  That money goes in the bank and the bank lends the money out.  This causes an increase in the money supply.

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