Which of the following will an expansionary fiscal policy increase?a.  potential output b. aggregate demand c. short-run aggregate supply d. long-run aggregate supply

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The correct answer here is B; an expansionary fiscal policy increases aggregate demand.

An expansionary fiscal policy consists of cutting taxes, increasing government spending, or both.  Such policies end up putting more money in the hands of consumers.  When consumers have more money, aggregate demand increases.

Consumers having more money does not affect aggregate supply.  It does not affect how much of a product producers are willing to produce at a given price.  All it does is to give consumers more money, thus allowing them to buy more things.  Therefore, B is the best answer.

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