the fiscal stimulus that returns the economy to full employment to full employme

Question

the fiscal stimulus that returns the economy to full employment to full employment from a below full employment equilibrium The fiscal stimulus that retuns the economy to full employment from a below full-employment equilibrium O A. must be an increase in government expenditure O B. could be an increase in government expenditure and an equal increase in taxes O C. must be a decrease in taxes O D. could be a decrease in government expenditure and an equal decrease in taxes Click to select your answer Type here to search

Explanation / Answer

When the economy is below full employment equilibrium, then there is a need for an expansionary fiscal policy. The expansionary fiscal policy may be either an increase in the government expenditure or decrease in the taxes.

This is because with the expansionary fiscal policy, AE curve shifts upward and it so the Real GDP increase and the economy comes back to new equilibrium at full employment level.

Hence it can be said that the fiscal stimulus that returns the economy to full employment from a below full employment equilibrium must be an increase in the government expenditure.

Hence option A is the correct answer.

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