Expansionary fiscal policy implies

Step 1: Analyze the question The question asks what expansionary fiscal policy involves. The key term is fiscal policy, which concerns government spending and taxation, not the central bank's tools.

Step 2: Explain the concept

• Fiscal policy is the government's use of taxation and public spending to influence the economy.
• Expansionary fiscal policy aims to boost economic activity, increase demand, and reduce unemployment. It does this by: • Reducing tax rates, so people and firms have more disposable income to spend and invest • Increasing government spending, for example on roads, schools and power projects
• Contractionary fiscal policy does the opposite. It raises taxes or cuts spending to cool inflation.
• Monetary policy is handled by the Central Bank of Nigeria (CBN). It uses tools such as the bank rate, the Monetary Policy Rate, bank loans and cash reserve ratios.

Step 3: Evaluate each option

• A. Decreasing bank loans: This is a monetary policy action, and it is contractionary because it reduces money in circulation. ✗
• B. Raising tax rates: This is fiscal, but it is contractionary because it reduces spending power. ✗
• C. Increasing the bank rate: This is monetary policy. Higher rates make borrowing costlier, so it is contractionary. ✗
• D. Decreasing tax rates: This is fiscal and expansionary. People keep more income, so spending, investment and output rise. ✓

Step 4: Answer The correct answer is D. decreasing tax rates.

💡 Exam tip: First decide whether the question is about fiscal policy (government taxes and spending) or monetary policy (central bank, interest rates and money supply). Then ask whether the action puts more money into the economy (expansionary) or takes money out (contractionary). Remember: Expansionary = tax down, spending up.