Expansionary fiscal policy increases government spending or cuts taxes to stimulate the economy

Steps:

• Define expansionary fiscal policy: It involves higher government spending or lower taxes to boost aggregate demand.
• Analyze budget impact: Increased spending or reduced tax revenue widens the gap between expenditures and revenues.
• Evaluate other options: Check if they directly result from fiscal (not monetary) actions.
• Select the direct effect: Identify the primary fiscal outcome among choices.

Why A is correct:

• Expansionary fiscal policy raises the budget deficit by formula: Deficit = Government Spending - Tax Revenue, as spending increases or revenue falls.

Why the others are wrong:

• B: Exchange rate is influenced by monetary policy or trade, not directly by fiscal expansion.
• C: Money supply is controlled by central bank monetary policy, not fiscal actions.
• D: Rate of direct taxation typically decreases in expansionary policy to encourage spending.

Final answer: A