Question

Which of the following fiscal policies would cause a decrease in aggregate demand?

Selected Answer:	A decrease in taxes and an increase in government spending. (wrong)
Answers:	An increase in transfer payments and an increase in government spending.
	An increase in transfer payments and a decrease in taxes.
	A decrease in taxes and an increase in government spending.
	An increase in taxes and a decrease in government spending

Answer 1

Fiscal policies refer to one of the most used methods by the govt to control economy through adjusting govt spending level and tax rates that influence a nation's aggregate demand . To decrease aggregate demand through fiscal policies the govt should increase taxes and decrease govt spending which are actually known as contractionary fiscal policy , if tax increases people will save more than spending or investing thus agg demand will be less in the economy, on the other hand if govt cut spending automatically agg demand will be less.