Answered: 1 Assume the aggregate demand of an…

1 Assume the aggregate demand of an economy is rising at 3%, but its productive capacity is only rising at 2%. Discuss the type of inflation this would lead to. Use a diagram to motivate your answer.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter30: Government Budgets And Fiscal Policy

Section: Chapter Questions

Problem 30RQ: Under what general macroeconomic circumstances might a government use expansionary fiscal policy?...

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Concept explainers

Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.

Question

1 Assume the aggregate demand of an economy is rising at 3%, but its productive capacity is only rising at 2%. Discuss the type of inflation this would lead to. Use a diagram to motivate your answer.
2 Explain how fiscal policy can be implemented if an economy is in the downswing of a business cycle.

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Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
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