Suppose expansionary fiscal policy is implemented to close a recessionary gap, a

Question

Suppose expansionary fiscal policy is implemented to close a recessionary gap, and unexpectedly the economy experiences a positive supply shock. The fiscal policy ends up being too _____ and real GDP ____________ potential output. A.  weak, stays below B.  weak, rises above C.  strong, rises above D.  strong, stays below Suppose expansionary fiscal policy is implemented to close a recessionary gap, and unexpectedly the economy experiences a positive supply shock. The fiscal policy ends up being too _____ and real GDP ____________ potential output. A.  weak, stays below B.  weak, rises above C.  strong, rises above D.  strong, stays below

Explanation / Answer

Expansionary fiscal policy would be used to speed up the rate of GDP growth or during a recession when GDP growth is negative. A tax cut and/or an increase in government spending would be implemented to stimulate economic growth and lower unemployment rates. These policies will lead to higher federal budget deficits.Fiscal policy impacts the growth rate of aggregate demand, given a constant growth in aggregate supply.So if the Economy is experience a postive supply shock than Fiscal policy end up being too strong and real GDP rises above the potential output hence the corect option is C.

Answer: C. Strong, rises above

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