How does fiscal stimulus typically influence economic growth?

Fiscal stimulus generally refers to government actions aimed at boosting economic activity, typically through increased spending or tax cuts. By injecting money into the economy, fiscal stimulus seeks to enhance demand for goods and services, which can lead to increased production and economic growth.

When the government increases its expenditures—on infrastructure projects, for instance—this spending creates jobs and provides income to workers, who then have more money to spend. This increased expenditure can lead to a multiplier effect, where the initial government spending generates further economic activity as recipients of this income spend their earnings on goods and services. Consequently, overall demand in the economy rises, leading to higher output and potentially prompting businesses to invest in expansion to meet this new demand.

Moreover, tax cuts can put more disposable income into the hands of consumers, encouraging them to spend more, thus further stimulating demand.

In contrast, the other choices do not accurately reflect the dynamics of fiscal stimulus. For example, stating that it restricts money flow into the economy contradicts the fundamental goal of fiscal policy, which is to increase liquidity and stimulate both consumption and investment. Similarly, asserting that fiscal stimulus reduces overall consumption does not align with its intent or typical outcomes. Lastly, the claim that fiscal stimulus has no measurable effect overlooks the