What does an increase in government expenditure typically indicate in terms of fiscal stance?

An increase in government expenditure typically signifies an expansionary fiscal policy because it is aimed at stimulating economic growth. When a government decides to spend more money, it injects additional funds into the economy, which can lead to increased demand for goods and services. This heightened demand can boost production, create jobs, and ultimately enhance overall economic activity.

Expansionary fiscal policy is often utilized during periods of economic downturn or recession when private sector demand is weak. By increasing government spending, the aim is to counteract this decline and lead to an uptick in economic performance. This can also include investments in infrastructure, public services, or transfers to individuals, all of which directly contribute to boosting economic activity.

The context of other options highlights that contractionary fiscal policies involve reducing government spending or increasing taxes, which is the opposite of an increase in expenditure. Neutral fiscal policy would mean that the government neither increases nor decreases spending, and deflationary policies specifically aim to reduce inflationary pressures rather than stimulate growth. Thus, an increase in government spending unmistakably aligns with expansionary fiscal policy.