Question

Appleville is a village that specializes in all forms of apple products. Suppose that each winter, when no apples are being produced, aggregate output falls below the long-run equilibrium output level. What type of fiscal policy might be most effective in correcting this problem?

reducing taxes in order to decrease aggregate demand


decreasing government spending in order to increase aggregate demand


increasing government spending in order to increase aggregate demand


increasing taxes in order to increase aggregate demand

Answer 1

Increasing government spending in order to increase aggregate demand

To Address the downturn, the government can employ an expansionary fiscal policy either by increasing spending or reducing taxes. The result would be an expansion of aggregate demand, moving the economy back toward the long-run equilibrium output.