Which of the following fiscal policy options would have greather potential of ca

Question

Which of the following fiscal policy options would have greather potential of causing inflation? An expansionary policy shifting aggregate demand from AD_1 to AD_2 An contractionary policy shifting aggregate demand from AD_4 to AD_3 An An expansionary policy shifting aggregate demand from AD_3 to AD_4 An contractionary policy shifting aggregate demand from AD_2 to AD_1 Contractionary fiscal policy includes cuts in government spending and increases in taxes and is designed to slow down the economy. reduces aggregate demand and shifts the aggregate demand curve inward includes increases in government spending and decreases in taxes and is designed to stimulate the economy Both "a" and "b" The economy is "heating up" and price pressure is being reported. Which of the following would be appropriate? cutting taxes increasing taxes increasing government spending increasing government spending and cutting taxes Classical economic theories such as those prior to the Great Depression supported balanced budgets and limited government involvement in the markets. Economists who favor this school of thought would support tax cuts during economic downturns and the reduction of government spending tax increases during economic downturns with increases in government spending tax cuts during economic downturns tax increases during periods of expansion

Explanation / Answer

40. Ans : option (c )

Explanation

When the expansionary policy introduced, Aggregate Expenditure is increased by increasing spending or decrease taxes. This leads to increase in aggregate demand and Aggregate demand curve shifts upwards (option a and c). When the stock available in the economy is less than the aggregate demand, it leads to inflation. Both option a and c can be correct because both option increase aggregate demand BUT option c mention more increase in aggregate demand (AD3 to AD4) as compare to option a( AD1 to AD2). Thus option (c ) is correct.

Option (b) and (d) shrinks the aggregate demand.

41. Ans option (d) i.e. both option a and b are correct.

Contractionary policy is used by the central bank of a country to slow down the economy. For this purpose Government curtail its expenses and increase taxes. As the taxes are increased, purchasing capacity of people decrease. This will decrease its aggregate demand. And aggregate demand curve shits downwards (inward).

Option (c) is incorrect because increases the government spending is done by expansionary policy.

42. Ans: option (d) is correct.

When an economy is ‘Heating up’, production capacity is unable to fulfill aggregate demand. To increase the production government increases the production and reduces taxes.

43.(a) Classical theories considers that government shrinks money supply to control the economy. This can be done by increasing the taxes and reducing spending.

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