Question

Draw graphs ( 2 Graphs) to show expansionary fiscal policy and describe what happens in each graph. One of the graphs must be the AD-AS graph.

Answer 1

The government can introduce the expansionary policy by either by increasing expenditures or reducing the tax levels in the economy. A reduction in the tax or the increased government spending will shift the aggregate demand curve to the right as shown in the above graph. As the aggregate demand raises will cause the price level to go up and the real GDP to increase.

The above diagram shows the effect expansionary fiscal using the IS-LM model. As the government introduce the fiscal policy the IS curve shifts to the right. This will create a higher interest rate in the economy and higher output. The higher interest rate in the economy because the higher demand for the money.