Consider Two Fiscal Policy Actions

question 33

Multiple Choice

Consider two fiscal policy actions.
I. a $400 billion reduction in income taxes
II. a $400 billion increase in government purchases
Which policy will have a bigger impact on aggregate demand?

• A) Both policies will have the exact same impact.
• B) Policy II because it affects aggregate demand directly.
• C) Policy I because it affects disposable income directly.
• D) Policy I because it works through consumption which is the largest component of aggregate demand.

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Definitions:

Price Ceiling

A government-imposed limit on how high a price is charged for a product, aimed at preventing prices from reaching levels deemed too high.

Price Floor

A government or group-imposed price control or limit on how low a price can be charged for a product. It is aimed at preventing prices from being too low.

Shortage

refers to a situation where the demand for a product or service exceeds the supply available at a specific price.

Surplus

The condition where quantity supplied exceeds quantity demanded, often leading to a decrease in prices.