Expansionary fiscal policy should be used if:
A)aggregate demand-aggregate supply equilibrium is below potential output.
B)aggregate demand-aggregate supply equilibrium is above potential output.
C)aggregate demand-aggregate supply equilibrium is equal to potential output.
D)none of the above.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy is designed to stimulate the economy by increasing government spending and/or cutting taxes. It is appropriate when the aggregate demand-aggregate supply equilibrium is below potential output, meaning there is a recessionary gap and the economy is operating below its full potential. By increasing government spending or cutting taxes, the policy aims to increase aggregate demand and close the output gap. Option B is incorrect as it describes an economy operating above its full potential, which would require contractionary fiscal policy to address inflationary pressures. Option C also does not warrant expansionary fiscal policy as the economy is already operating at its potential output. Option D is incorrect as at least one of the above options must be true in order for fiscal policy to be considered.

Expansionary Fiscal Policy Should Be Used If