Multiple Choice
Which of the following typically occurs with expansionary fiscal policy?
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19. Fiscal Policy
Expansionary and Contractionary Fiscal Policy
Multiple Choice
In the context of expansionary and contractionary fiscal policy, the intent of contractionary fiscal policy is to:
A
Raise long-run potential output by improving productivity through supply-side reforms
B
Increase aggregate demand to raise real output and reduce unemployment during a recession
C
Reduce aggregate demand to slow an overheated economy and reduce inflationary pressures
D
Increase the money supply to lower interest rates and stimulate private investment
Verified step by step guidance1
Step 1: Understand the purpose of fiscal policy, which involves government decisions on taxation and spending to influence the economy.
Step 2: Differentiate between expansionary and contractionary fiscal policy. Expansionary policy aims to increase aggregate demand, often used during recessions to boost output and reduce unemployment.
Step 3: Recognize that contractionary fiscal policy is designed to reduce aggregate demand, typically by decreasing government spending or increasing taxes.
Step 4: Connect the goal of contractionary fiscal policy to slowing down an overheated economy, which helps reduce inflationary pressures by cooling demand.
Step 5: Note that contractionary fiscal policy does not directly aim to raise long-run potential output or increase the money supply; those are related to supply-side reforms and monetary policy, respectively.
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