Which of these effects of expansionary spending would a government most want to avoid?
A. higher employment
B. higher inflation
C. growth in production
D. growth in consumer spending
Answer: B. higher inflation
Being afraid of a higher inflation if expansionary fiscal policy were used, the government would like to prevent it. One of the most common fiscal policies is the expansionary policy, which consists in increasing government spending and or tax cuts. This type of fiscal policy is done with the idea of stimulating the economic growth, reducing the unemployment rates, and eventually putting more money in consumers’ pockets. While these measures are beneficial if used properly or with precautions, otherwise they might encourage the economy to boil and cause inflation.
Price escalations cut consumer buying power, subjugate the monetary value of savings, and investments, and makes all business transactions highly vulnerable to economic upheavals. Inflation is often kept low in order from the government to be able to prevent a deterioration in the control of growth and maintain the faith of the people.