Question

If an economy at full employment experiences a fall in aggregate demand, then what should the government do to restore the economy to full employment? Select the correct answer below: Institute quantity controls in order to maintain full output. Institute price controls in order to maintain full employment. The government should engage in contractionary fiscal policy. The government should engage in expansionary fiscal policy.

Answer 1

The government should engage in expansionary fiscal policy.

Step-by-step explanation:

If there is a fall in the aggregate demand in an economy then this will restore by implementing the expansionary fiscal policy and the full employment level is achieved.

Expansionary fiscal policy states that a government of this nation should reduces taxes and increases its spending for inducing the aggregate demand to boost up. Lower taxes would increase the disposable income of the consumers and hence, the demand for goods and services increases.

These changes would increase the aggregate demand and shifts rightwards. This will maintain the full employment level in this economy.