Question

Assume the economy is at full employment but planned investment exceeds saving. Other things being equal, what fiscal policy actions would best address this problem?

Answer 1

Increase taxes and decrease government spending

Step-by-step explanation:

Fiscal policy is used to bring an economy back to normal.

When the economy is at full investment and planned investment is greater than savings, the best policy action would be to Increase taxes and decrease government spending. By increasing taxes there would be a fall in disposable income and household spending would decrease.

Changes in fiscal policy has effects on GDP, unemployment, and inflation. In this question this would be contractionary fiscal policy. Aggregate demand would fall and there would be lower output, lower employment and lower price level