Question

If the government wants to engage in fiscal policy to increase real GDP, it could A)...

If the government wants to engage in fiscal policy to increase real GDP, it could

A) decrease government expenditure in order to decrease aggregate demand.

B) increase government expenditure in order to increase aggregate demand.

C) decrease government expenditure in order to increase short-run aggregate supply.

D) increase government expenditure in order to increase short-run aggregate supply.

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Answer #1

Fiscal policy involves changes in government spending and/or tax policies to inlfuence the economy's aggregate demand and employment.

To increase real GDP, government uses expansionary fiscal policy, meaning either increase in government spending or decreases in taxes, to boost the aggregate demand. Since government spending is a component of aggregate demand, AD= C+I+G+NX, a rise in government expenditure (G) would increase the overall aggregate demand (AD). This, in turn, would lead to a rise in real output level in the economy.

Hence, the correct answer is option (B).

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