Question

If Congress and the president want to keep real GDP at its potential level in​ 2021, they should use an expansionary fiscal policy, which would mean:
a) increasing government spending or cutting taxes
b) decreasing government spending or increasing taxes
c) increasing the money supply
d) decreasing the money supply

Answer 1

Answer:

a) increasing government spending or cutting taxes

Explanation:

Fiscal polices are polices enacted by the government to achieve certain macroeconomic objectives. There are two types of fiscal policies:

1. Expansionary fiscal policy: These are government policies which involves increasing government spending or cutting taxes. Decreasing taxes increases disposable income and increases consumption spending.

Increasing government spending increases money supply which increases consumption spending.

2. Contractionary fiscal policy: These are government policies which involves decreasing government spending or increasing taxes.

Monetary policy are policies enacted by the Central bank to achieve certain macroeconomic objectives.  

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