Expansionary fiscal policy boosts aggregate demand, reducing cyclical unemployment

Steps:

• Expansionary fiscal policy involves increasing government spending or cutting taxes to stimulate economic activity.
• This raises aggregate demand, shifting the AD curve rightward in the AD-AS model.
• Higher demand increases real GDP and output, moving the economy closer to full employment.
• As production rises, firms hire more workers, lowering unemployment.

Why B is correct:

• Cyclical unemployment decreases per Okun's law, which links GDP growth to unemployment reductions (1% GDP increase lowers unemployment by about 0.5%).

Why the others are wrong:

• A: Balance of payments deficit likely increases due to higher imports from stimulated growth.
• C: Wage levels rise with increased labor demand in a growing economy.
• D: Inflation rate increases as demand-pull pressures exceed supply capacity.

Final answer: B