Suppose that the administration proposes to follow a contractionary fiscal policy.This would cause the
A)AD to shift rightward and raise the price level.
B)SAS to shift rightward and lower the price level.
C)AD to shift leftward and lower the price level.
D)SAS to shift leftward and raise the price level.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy aims to decrease the aggregate demand in the economy by reducing government spending or increasing taxes. This would cause a leftward shift in the AD curve, resulting in lower output and lower price level. It is the opposite of expansionary fiscal policy, which increases AD by increasing government spending or reducing taxes. The SAS curve is not directly affected by fiscal policy.

Suppose That the Administration Proposes to Follow a Contractionary Fiscal