Question

To raise GDP, which of the following might the government do?

	Contractionary Fiscal Policy
	lower individual tax rates
	cause AD to shift left
	decrease Govt spending

If AD is shifting left, which of the following is likely occurring?

	Expansionary Fiscal Policy
	Inflation
	Contractionary Fiscal Policy
	increasing GDP

If our economy is experiencing an expansionary gap, which of the following would be the likely response by our govt?

	increase AD
	lowering corporate taxes
	Expansionary Fiscal Policy
	actions that would cause AD to shift left

Answer 1

Q1.

GDP = C + I + G + NX = AD

In order to increase the GDP, the AD curve must be shifted to its right. This can be achieved by adopting expansionary fiscal policy such as introducing tax cuts, increasing government spending etc. If 'G' is increased, the GDP increases.

Ans: lower individual tax rates

Q2. A leftward shift in the AD curve indicates a decrease in the GDP. A decrease in GDP occurs due to a contractionary fiscal policy like increasing tax rates, decreasing government spending etc.

Inflation does not cause a shift in the AD curve. It merely causes a movement along the AD curve.

Ans: Contractionary Fiscal Policy

Q3. An expansionary gap occurs in an economy when the short-run actual output of the economy exceeds the potential output of the economy. In such a scenario, the government tries to shift the AD curve towards its left in order to remove the expansionary gap.

A leftward shift in the AD curve is brought by adopting contractionary fiscal policy such as those explained in Q2 above.

Ans: actions that would cause AD to shift left