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Which of the following will cause an increase in aggregate demand? 1) Restrictive fiscal policy
Which of the following will cause an increase in aggregate demand? 1) Restrictive fiscal policy. 2) An increase in the reserve requirement. 3) Expansionary monetary policy. 4) The sale of bonds by the Fed.
Expert Solution
When government wants to increase aggregate demand, it uses expansionary policy either fiscal or monetary. It is because expansionary monetary policy will increase the amount of money in the economy that provides incentive to the consumers to buy more commodities and serves. This change in consumer behavior will result in an increase in AD in the economy.
Wrong options:
- Restrictive fiscal policy is a contractionary policy.
- Increased reserve requirement will lower the money supply in the economy.
- By selling bonds, Fed reduces money supply.
Hence, the correct option is: 3) Expansionary fiscal policy.
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