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AD3 AS AD AD, AD C3 Real GDP

Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

Question 3 options:

AD0.

AD2.

AD3.

None of these.
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Answer #1

Answer: AD0

Expansionary fiscal policy is used to pull the economy out of recession and to increase the money supply. Expansionary fiscal policy causes an rightward shift of the aggregate demand curve, which means increase in aggregate demand, increase in output and increase in employment. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at AD0.

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