Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.
A) right; inflationary
B) right; recessionary
C) left; inflationary
D) left; recessionary

Question

Quizplus · Accepted Answer

Expansionary fiscal policy involves government increasing its spending and/or reducing taxes, which leads to an increase in overall demand in the economy. This shift the aggregate demand curve to the right, resulting in higher output and employment levels. It is used to close a recessionary gap, which is a situation where the actual output in the economy is below its potential level, leading to high unemployment and low economic growth. Option A is incorrect because shifting the aggregate demand curve to the right will worsen inflationary gaps, where the economy is producing at a level beyond its capacity, leading to rising prices and inflation. Option C is also incorrect because reducing government spending and/or increasing taxes, which is a contractionary fiscal policy, will shift the aggregate demand curve to the left, resulting in lower output and employment levels, and is used to close inflationary gaps. Option D is incorrect because, as noted above, expansionary fiscal policy is used to close recessionary gaps rather than inflationary gaps.

Expansionary Fiscal Policy Shifts the Aggregate Demand Curve to the _____