Why would a government’s expansionary fiscal policy lead to a larger budget deficit?

Expansionary fiscal policy involves increased government spending and/or tax cuts to stimulate economic growth.

Why is Option D Correct?

If the government spends more than it collects in taxes, it must borrow money, increasing the budget deficit.

Governments issue bonds to finance the deficit.

Why Not Other Options?

A (Less tax revenue) → While tax cuts may reduce revenue, borrowing is the main reason for a budget deficit.

B (Falling interest rates) → Interest rates are monetary policy, not fiscal policy.

C (Drop in private spending) → Expansionary policy aims to increase private spending, not reduce it.

???? Reference: UK Office for Budget Responsibility (OBR), CISI Wealth & Investment Management.