Question

Appleville is a village that specializes in all forms of apple products. Suppose that each winter, when no apples are being produced, the aggregate output falls below the long-run output level. What type of fiscal policy might be most effective to correct this problem? a) Reducing taxes in order to decrease aggregate demand b) Increasing taxes in order to increases aggregate demand c) Increasing government spending in order to increase aggregate demand d) Decreasing government spending in order to increase aggregate demand

Answer 1

Answer:

The correct answer is c) Increasing government spending in order to increase aggregate demand

Explanation:

Fiscal policy is based on the ideas of the economist Jhon Keynes, who says that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies.

There are two common types of Fiscal policy: "Expansionary policies and Contractionary policies".

For this problem is necessary an Expansionary policy

Spending: The government may generate economic expansion through increases in spending. The government could increase employment, pushing up demand and growth.

Taxes: When people pay lower taxes, they have more money to spend or invest, which traduce into a higher demand