Which type of fiscal policy is used to encourage economic growth, often through increased spending or tax cuts?

Expansionary policy is designed to stimulate economic growth by increasing aggregate demand. This is typically achieved through government actions such as increased public spending on infrastructure or social programs, as well as implementing tax cuts to leave individuals and businesses with more disposable income. When consumers and businesses have more money to spend, demand for goods and services rises, which can lead to increased production, job creation, and overall economic expansion.

This type of policy is particularly useful during economic downturns or periods of slow growth, as it aims to boost economic activity and restore confidence in the economy. By contrast, the fiscal policies aimed at reducing government spending or increasing taxes would generally be considered contractionary, as they work to cool down an overheating economy or reduce public debt rather than promote growth. Neutral and restrictive policies are also not focused on encouraging growth but rather on maintaining stability or reducing inflation. Therefore, expansionary policy is the correct approach when the goal is to spur economic development.