Answer to Question #109642 in Macroeconomics for Thotyelwa Kosi

Question

Suppose the government decides to pursue an expansionary fiscal policy. Within the AD-AS framework, what will be the impact on the economy?

Answer 1

Expansionary policies are policies that involves decreasing taxes , increasing government expenditure or both.On the AD side ,a decrease in taxes means household have more disposable income to spend and save more.Expansionary policies lead to a right hand shift in aggregate demand.On the AS side , government spending can be used to fund an expansion in small and new business.Lower rates of corporation tax might attract inward investment from abroad.