Question

Suppose that the government immediately pursues an _____________ policy by increasing government purchases in response to the short-run economic impact of the higher oil prices.

Answer 1

Answer:

The answer to the blank space is: expansionary fiscal policy

Explanation:

Expansionary fiscal policy consists in either the increase of government purchases (fiscal spending), or the reduction of taxes, or both.

Expansionary fiscal policy is recommended when the economy is experiencing a downturn, and can be helpful in reducing the damage that the economic slump generates.

In the case of the question, higher oil prices for an importing country will result in less economic activity because this important fuel becomes more expensive, both for manufacturing, agriculture and services. For this reason, the government responds by increasing spending with the goal of reactivating the economy as soon as possible, and reducing the damange that was already done.