If the effects of expansionary fiscal policy hits when the economy is already expanding a. The...
If the effects of expansionary fiscal policy hits when the economy is already expanding
| a. |
The effects could lead to even deeper recession |
|
| b. |
The policy will have no effect |
|
| c. |
The policy is called an automatic stabilizer |
|
| d. |
It may lead to excessive aggregate demand and inflation |
|
| e. |
It will lead to stagflation |
Homework Answers
Answer
Option d
It may lead to excessive aggregate demand and inflation
An economy is expanding means the AD is going to shift right but the expansionary fiscal policy also increases AD and shifts it more than required then the real GDP and price level increases, but the actual real GDP will be higher than the potential real GDP, so there are an excessive AD and inflation in the economy which is called inflationary gap.
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