Expansionary fiscal policy can be used to reduce cyclical unemployment by
A) increasing long-run aggregate supply so as to raise real GDP.
B) increasing aggregate demand so as to raise real GDP.
C) raising nominal wages so as to encourage workers to work more hours.
D) eliminating inefficiencies from labor markets.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy involves increasing government spending, decreasing taxes or both, which increases aggregate demand and leads to an increase in real GDP. This increase in output may create more job opportunities and reduce cyclical unemployment. Therefore, increasing aggregate demand is the most effective way to reduce cyclical unemployment through expansionary fiscal policy. The other options listed do not directly address cyclical unemployment.

Expansionary Fiscal Policy Can Be Used to Reduce Cyclical Unemployment