Fiscal policy can shift: Group of answer choicesboth aggregate demand and potential outputaggregate demand onlyonly short-run functionsboth aggregate demand and short-run aggregate supply, but not long-run aggregate supply
Question
Fiscal policy can shift: Group of answer choicesboth aggregate demand and potential outputaggregate demand onlyonly short-run functionsboth aggregate demand and short-run aggregate supply, but not long-run aggregate supply
Solution
Fiscal policy can shift both aggregate demand and potential output.
Here's why:
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Aggregate Demand: Fiscal policy can directly affect aggregate demand through government spending and indirectly through taxation and transfer payments. For example, an increase in government spending on public services or infrastructure can increase aggregate demand as it increases total spending in the economy. Similarly, a decrease in taxes can increase disposable income for households, leading to increased consumption and thus increasing aggregate demand.
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Potential Output: Fiscal policy can also affect the potential output of an economy. Potential output refers to the maximum amount of goods and services an economy can produce when it is fully utilizing its resources. Fiscal policy can influence this through public investment in areas like infrastructure, education, and research and development, which can increase the economy's productive capacity. For example, investment in education can increase human capital, leading to higher productivity and thus increasing potential output.
Therefore, fiscal policy can shift both aggregate demand and potential output.
Similar Questions
A decline in aggregate demand has caused a recession. The economy’s current level of real GDP is below its long-run equilibrium and the current price level is below the equilibrium price level. a. Without government action, the economy will return to long-run equilibrium through multiple choice 1a decrease in aggregate supply.a decrease in long-run aggregate supply.an increase in aggregate supply.an increase in long-run aggregate supply. b. If the government implements expansionary fiscal policy after the economy has self-corrected, the increase in aggregate demand will multiple choice 2decrease both real GDP and the price level.increase both real GDP and the price level.decrease real GDP and increase the price level.increase real GDP and decrease the price level. c. The slow fiscal policy will result in multiple choice 3low interest rates.high unemployment.demand-pull inflation.cost-push inflation.
The effect of expansionary fiscal policy is shown as aMultiple Choicerightward shift in the economy's aggregate demand curve.leftward shift in the economy's aggregate supply curve.leftward shift in the economy's aggregate demand curve.movement along an existing aggregate demand curve.
The usual aim of expansionary fiscal policy is to increaseMultiple Choiceaggregate demand.aggregate supply.both aggregate demand and aggregate supply.government spending.
Which type of policy does the governments adopt to increase the aggregate demand in the economy?Contractionary fiscal policyExpansionary fiscal policyTight monetary policyLoose monetary policy
The application of fiscal policy to increase aggregate demand is called a(n) fiscal policy.
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