Explanation

Correct Answer: B - an increase in public spending on social goods and infrastructure.

Why B is correct:

1. Fiscal Policy Definition: Fiscal policy refers to the use of government spending and taxation to influence the economy. Expansionary fiscal policy aims to stimulate economic growth by increasing aggregate demand.

2. Expansionary Fiscal Policy Tools:

   • Increasing government spending (Option B) - This directly injects money into the economy, creating jobs, increasing incomes, and boosting consumption.
   • Decreasing taxes - This puts more money in consumers' and businesses' hands, increasing disposable income and encouraging spending.

Why A is incorrect:

• A reduction in bank reserve requirements is a monetary policy tool, not fiscal policy. This is controlled by central banks to influence the money supply and credit availability.

Why C is incorrect:

• The purchase of government bonds through open market operations is also a monetary policy tool used by central banks to increase the money supply and lower interest rates.

Key Distinction:

• Fiscal Policy: Government spending and taxation decisions made by the legislative/executive branches.
• Monetary Policy: Actions by central banks (like the Federal Reserve) to control money supply and interest rates.

Economic Impact of Expansionary Fiscal Policy:

• Increases aggregate demand
• Stimulates economic growth
• Reduces unemployment
• May lead to higher inflation if the economy is near full capacity
• Increases government budget deficits or reduces surpluses