Fiscal policy is a good option to stimulate an economy when:
A) consumer saving is very low.
B) consumer spending is very low.
C) there has been a negative technological shock in the economy.
D) LRAS has suddenly shifted to the left.

Question

Quizplus · Accepted Answer

When consumer spending is very low, fiscal policy can be used to increase government spending or decrease taxes, which would put more money in people's pockets and potentially stimulate spending in the economy. However, in the other scenarios listed:
A) If consumer saving is very low, it may be a sign of an overheating economy and fiscal policy could be used to decrease government spending or increase taxes to cool down the economy.
C) A negative technological shock may require structural policy changes, rather than just fiscal policy, in order to address the root cause.
D) If LRAS has suddenly shifted to the left, it may require a mix of monetary and fiscal policy to address the underlying factors causing the decline in long run aggregate supply.

Fiscal Policy Is a Good Option to Stimulate an Economy