Which of the following situations illustrates how fiscal policy can influence aggregate demand?
A)The government reduces the goods and services tax.As a result, consumption expenditure increases and aggregate demand increases.
B)The exchange rate value of the Canadian dollar rises.As a result, people living near the U.S.- Canada border increase their imports of goods and net exports decrease.
C)Investors, anticipating an erosion of financial wealth due to inflation, decide to save more.As a result, aggregate demand decreases.
D)The government increases its expenditures.The demand for loanable funds increases, which raises the real interest rate.Investment increases.
E)The Bank of Canada raises interest rates so people plan to buy fewer consumer durables.As a result, aggregate demand decreases.

Question

Quizplus · Accepted Answer

When the government reduces the goods and services tax, it leads to an increase in disposable income for consumers. This, in turn, increases consumption expenditure, leading to an increase in aggregate demand. This is an example of expansionary fiscal policy. The other options are related to changes in exchange rates, inflation expectations, interest rates, and investment. While these factors can also influence aggregate demand, they do not directly involve fiscal policy.

Which of the Following Situations Illustrates How Fiscal Policy Can