What is a potential consequence of expansionary fiscal policy?

Expansionary fiscal policy is designed to stimulate economic growth, typically through increased government spending and/or tax cuts. When a government implements this type of policy, it often leads to higher budget deficits. This occurs because the government is spending more money than it normally would to encourage economic activity, which can increase its borrowing if revenues do not increase correspondingly.

The increase in budget deficits is a direct outcome of this strategy, as more funds are allocated towards public projects, social programs, and various forms of economic assistance. The intent behind this approach is to boost demand in the economy, which can help to pull the economy out of a recession or increase consumption during slower economic periods.

In contrast, the other options suggest outcomes that are not aligned with the goals of expansionary fiscal policy. For instance, decreased government spending and increased surpluses would typically be associated with contractionary fiscal policy, which aims to reduce economic activity, while a reduction in taxes overall may not necessarily lead to deficits without accompanying increases in government spending. Therefore, recognizing the relationship between expansionary fiscal policy and increased budget deficits is essential for understanding its implications within macroeconomic theory.