Why might an expansionary fiscal policy lead to future inflationary pressures?

Why might an expansionary fiscal policy lead to future inflationary pressures?
A . It causes higher interest rates
B . Workers demanding higher wages
C . Due to a significant fall in private sector investment
D . Due to the effect of time lag

View Answer

Answer: B

Explanation:

Expansionary Fiscal Policy and Inflation:

Expansionary fiscal policy increases aggregate demand by boosting public spending or reducing taxes. This raises employment, leading to higher wage demands as workers negotiate for their share of economic growth.

Higher wages increase production costs, causing inflationary pressures.

Elimination of Other Options:

A: Higher interest rates are associated with contractionary, not expansionary, policy.

C: Private sector investment typically rises, not falls.

D: Time lag affects the policy’s impact but is not a direct cause of inflation.

Reference: ICWIM Module 1: Discussion on fiscal policy and its effects on inflation.