Question

33. Which of the following is true for an expansionary fiscal policy?

a. It leads to a fall in the interest rate.

b. It has no impact on the aggregate output.

c. It causes an increase in the aggregate demand.

d. It increases the level of imports.

34. An increase in the domestic price level will:

a. shift the IS curve to the right.

b. shift the LM curve to the right.

c. shift the FE curve to the left.

d. lead to a surplus in the balance of payments.

Answer 1

33. c. It causes an increase in the aggregate demand.

Expansionary fiscal policy includes either increase in government spending or decrease in taxation. Increase in government spending increases G component of AD and shifts AD curve rightwards. Decrease in taxes increases disposable income of consumer and thus increases consumption spending which shifts AD rightwards. It leads to increase in aggregate output and does not affect imports of a country.

34. c. shift the FE curve to the left.

Increase in price level decreases the disposable income of consumer and thus real wage of labors also decreases. As a result FE curve shifts to the left. Change in price level does not shift IS curve. Increase in price level causes decrease in Real money supply and thus shfits LM leftwards.