Answer 1-3 1. An expansionary fiscal policy can increase the level of aggregate

Question

Answer 1-3

1. An expansionary fiscal policy can increase the level of aggregate demand by all of the following EXCEPT

a. cutting tax rates to increase disposable income and spending.

b. decreasing government purchases.

c. reducing corporate tax rates to increase investment spending.

2. An expansionary fiscal policy can increase the level of aggregate demand by

a. reducing grants to state and local governments.

b. decreasing government purchases.

c. reducing corporate tax rates to increase investment spending.

3. An increase in government purchases shifts the aggregate demand curve to the right by an amount equal to:

a. the increase in government purchases times the expenditure multiplier.

b. the expenditure multiplier.

c. the increase in government purchase divided by the expenditure multiplier.

d. the increase in government purchases.

Explanation / Answer

(1) The correct option is option (b).  decreasing government purchases reduces the aggregate demand (because govt. expenditures is a component of aggregate demand) which in turn reduces the equilibrium output in the economy.

(2) The correct option is option (c). reducing corporate tax rates to increase investment spending and investment is a component of Aggregate demand so aggreagte demand increases.

(3) The correct answer is option (c). An increase in government purchases shifts the aggregate demand curve to the right by an amount equal to the increase in government purchases..

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