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When the economy is in a recession, expansionary fiscal policy can be used to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply and demand perspective at the same time?
Select one:
a. The government lowers tax rates.
b. The government lowers tax rates and issues a partial refund of taxes that have already been paid.
c. The government raises tax rates and reduces unemployment insurance payments.
d. The Federal Reserve decreases the money supply and raises the interest rate while the government simultaneously reduces future taxes.
d. The Federal Reserve decreases the money supply and raises the interest rate while the government simultaneously reduces future taxes.
FEEDBACK: From a supply-side perspective, the government can lower tax rates. This gives people the incentive to work harder and earn more income. In the process, more output is produced, thus shifting the short- and long-run aggregate supply curves. From a demand-side perspective, either partially refunding previously paid taxes or undertaking an infrastructure project (increasing government spending) should increase aggregate demand. Both represent an expansionary fiscal policy.

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Scenario d. represents expansionary fiscal policy from both a supply and demand perspective at the same time.

In scenario d., the Federal Reserve decreases the money supply and raises the interest rate, which represents a contractionary monetary policy. At the same time, the government reduces future taxes, which represents an expansionary fiscal policy.

From an inventory side viewpoint, the public authority can bring down charge rates. People are motivated to put in more effort and earn more money as a result of this. More output is produced as a result, causing shifts in both the short-term and long-term aggregate supply curves. From a demand-side perspective, either undertaking an infrastructure project (which increases government spending) or partially refunding taxes paid in the past should raise aggregate demand. Both address an expansionary monetary strategy.

Learn more about Demand and Supply here:

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