Using the following figure, suppose that a change in fiscal policy shifts AD from AD (1)...
- Using the following figure, suppose that a change in fiscal
policy shifts AD from AD (1) to AD (2). Which response would be
most likely to cause that shift? Choose one of a, b, c, or d.
- A rise in taxes OR a rise in government spending
- A rise in taxes OR a fall in government spending
- A fall in taxes OR a rise in government spending
- A fall in taxes OR a fall in government spending
Homework Answers
Fiscal policy means government intervention in the economy by influencing Aggregate demand through change in either taxes or government expenditure or combination of both.
As it has been given that a change in the fiscal policy shifts AD from AD1 to AD2 but it is not given that shift is either leftward or rightward.
So if there is rightward shift, then the correct fiscal policy will be expansionary fiscal policy. In this government either cut taxes or increases its spending.
For this option c is correct answer.
C; A fall in taxes OR a rise in government spending
So if there is leftward shift, then the correct fiscal policy will be contractionary fiscal policy. In this government either rise taxes or decreases its spending.
For this option b is correct answer.
b; A rise in taxes OR a fall in government spending
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