Fiscal Policy: The Best Case Scenario

What happens to an economy's real GDP growth rate and aggregate demand when consumers become fearful and significantly reduce their consumption?

• The real GDP growth rate increases, and aggregate demand shifts to the right.

• The real GDP growth rate decreases, and aggregate demand shifts to the left.

• The real GDP growth rate remains stable, but inflation increases.

• The real GDP growth rate decreases, and aggregate supply shifts to the left.

Why might a government choose to intervene with fiscal policy during an economic downturn, even if the economy is expected to recover in the long run?

• To prevent inflation from rising too quickly.

• To accelerate the natural adjustment process and mitigate short-term hardship.

• To increase the economy's long-run growth potential.

• To reduce the national debt.

Which of the following actions represents an expansionary fiscal policy aimed at counteracting falling aggregate demand?

• Increasing taxes on private consumption.

• Decreasing government spending.

• Increasing government spending or decreasing taxes.

• Increasing interest rates.

What economic principle suggests that government spending does not need to be as large as the initial fall in consumption to counteract a recession?

• The law of diminishing returns.

• The fiscal multiplier effect.

• The principle of comparative advantage.

• The concept of sticky wages and prices.