Question

The economy is growing far too quickly, as high aggregate demand is causing inflation. a. What fiscal policy should be pursued in this instance? fiscal policy. b. What will be the effect of the appropriate policy on aggregate demand? Aggregate demand will shift to the _____ .

Answer 1

Answer:

(a) Contractionary fiscal policy

(b) Aggregate shifts leftwards

Explanation:

Fiscal policy is a tool that is used by the government of a nation to control the fluctuations in the aggregate demand.

In this type of situation, government prefer to implement contractionary fiscal policy in the following form:

(1) Decreases government spending

(2) Increases taxes

When government increases taxes then as a result there is a fall in the consumer's disposable income. Therefore, the demand for the goods and services decreases in this economy and shifts the aggregate demand curve leftwards.