Which of the following situations illustrates how fiscal policy can influence aggregate demand?
A)The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, aggregate demand decreases.
B)Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases.
C)The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases.
D)The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-Canada border increase their imports of goods and net exports decrease.
E)The government increases its expenditures. The demand for loanable funds increases, which raises the real interest rate. Investment increases.

Question

Quizplus · Accepted Answer

The reduction in the goods and services tax would lead to a decrease in prices, which increases real income and therefore consumption expenditure. This increase in consumption expenditure would lead to an increase in aggregate demand.

It is important to note that the other choices do not illustrate how fiscal policy can influence aggregate demand. Choice A and B illustrate the effects of monetary policy on aggregate demand. Choice D illustrates the effect of a change in exchange rates on net exports, which is a component of aggregate demand but not fiscal policy. Choice E illustrates the effect of increased government expenditures on investment but does not mention any effects on aggregate demand.

Which of the Following Situations Illustrates How Fiscal Policy Can