Both fiscal policy and monetary policy can impact aggregate demand because they can influence the factors used to calculate it: consumer spending on goods and services, investment spending on ...
Expansionary fiscal policy is the use of government spending, taxation and transfer payments to stimulate aggregate demand. Whenever the government is increasing its own purchases, lowering taxes ...
Expansionary fiscal policy can also lead to inflation because of the higher demand in the economy. Paradox of thrift One argument for fiscal policy is that the government spend more to offset the rise in private sector saving and fall in private sector spending.
Fiscal policy that increases aggregate demand is --- Expansionary If the economy is at potential output, and consumption spending suddenly decreases due to a fall in consumer confidence, the appropriate fiscal policy is --
D. use expansionary fiscal policy to shift aggregate demand to the left. A. use contractionary fiscal policy to shift aggregate demand to the left. Assume that laws have been passed that require the federal government to run a balanced budget.
Fiscal policy is the use of government spending and taxation to influence the economy. Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve the economic objectives of price stability, full employment, and economic growth.
Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective, especially in a liquidity trap where, they argue, crowding out is minimal. In the classical view, expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income.
The aggregate demand/aggregate supply model is useful in judging whether expansionary or contractionary fiscal policy is appropriate. Consider first the situation in Figure 2, which is similar to the U.S. economy during the recession in 2008–2009.
When interest rates are cut (which is our expansionary monetary policy), aggregate demand (AD) shifts up due to the rise in investment and consumption. The shift up of AD causes us to move along the aggregate supply (AS) curve, causing a rise in both real GDP and the price level.
Expansionary policy is a useful tool for managing low-growth periods in the business cycle, but it also comes with risks. Economists must know when to expand the money supply to avoid causing side ...