Expansionary fiscal policy boosts economic activity through government actions

Steps:

• Define fiscal policy as government spending and taxation decisions affecting the economy.
• Identify expansionary fiscal policy as increasing spending or cutting taxes to raise aggregate demand.
• Analyze budget changes: deficit grows with more spending/less revenue; surplus shrinks oppositely.
• Match options to policy type: decreasing surplus aligns with expansionary effects.

Why B is correct:

• Expansionary fiscal policy reduces budget surplus by increasing spending or decreasing taxes, injecting more money into the economy per Keynesian theory.

Why the others are wrong:

• A: Decreasing budget deficit tightens fiscal stance, making it contractionary.
• C: Exchange rate changes relate to monetary policy or trade, not fiscal actions.
• D: Money supply adjustments are tools of monetary policy, controlled by central banks.

Final answer: B