QUESTION 5 Why would a government want to use expansionary fiscal policy to help

Question

QUESTION 5 Why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long-run equilibrium on its own? A. Expansionary fiscal policy always works in stimulating aggregate demand B. It could take a long time for prices to adjust by market forces alone. C. Expansionary fiscal policy has no adverse effects on the economy. D. When prices adjust during a recession, we see increases in inflation E. Expansionary fiscal policy is easy to get approved by Congress and the president

Explanation / Answer

A. Expansionary Fiscal policy always works in stimulating aggreate demand.

Fiscal policy affects aggregate demand through changes in government spending and taxation. Government spending and taxation influence employment and household income. If the income of the consumer is more he will spend more and invest more.

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