The figure above shows an economy aggregate demand curve and aggregate supply curves.
-Suppose the shift from AD₀ to AD₁ and from AS₀ to AS₁ is the result of fiscal policy.Which of the policies below could lead to these shifts?
i. An increase in government expenditure
ii. A tax cut
iii. A decrease in government expenditure
iv. A tax hike
A) i only
B) iv only
C) i and ii
D) iii and iv
E) i and iv

Question

The figure above shows an economy aggregate demand curve and aggregate supply curves.
-Suppose the shift from AD₀ to AD₁ and from AS₀ to AS₁ is the result of fiscal policy.Which of the policies below could lead to these shifts?
i. An increase in government expenditure
ii. A tax cut
iii. A decrease in government expenditure
iv. A tax hike
A) i only 
B) iv only 
C) i and ii 
D) iii and iv 
E) i and iv

Quizplus · Accepted Answer

Fiscal policy involves changes in government spending and taxation to affect the level of aggregate demand in the economy. An increase in government expenditure or a tax cut will increase aggregate demand and shift the AD curve to the right from AD₀ to AD₁. Therefore, options i and ii could lead to the shifts in the curves shown in the figure. In contrast, a decrease in government expenditure or a tax hike will decrease aggregate demand and shift the AD curve to the left. Therefore, options iii and iv are not applicable in this case.

The Figure Above Shows an Economy Aggregate Demand Curve and Aggregate