QuestionJuly 17, 2025

At any given price level, which of the following fiscal policies will decrease real GDP demanded, other things remaining constant? a. An increase in net taxes. b. An increase in money supply. c. An increase in fiscal spending on infrastructure. d. An increase in transfer payments.

At any given price level, which of the following fiscal policies will decrease real GDP demanded, other things remaining constant? a. An increase in net taxes. b. An increase in money supply. c. An increase in fiscal spending on infrastructure. d. An increase in transfer payments.
At any given price level, which of the following fiscal policies will decrease real GDP demanded, other things remaining constant?
a. An increase in net taxes.
b. An increase in money supply.
c. An increase in fiscal spending on infrastructure.
d. An increase in transfer payments.

Solution
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Answer

a. An increase in net taxes. Explanation 1. Identify the effect of each option on real GDP demanded a. An increase in net taxes reduces disposable income, leading to decreased consumption and thus decreases real GDP demanded. b. An increase in money supply typically lowers interest rates, encouraging investment and increasing real GDP demanded. c. An increase in fiscal spending on infrastructure directly increases aggregate demand, raising real GDP demanded. d. An increase in transfer payments boosts disposable income, leading to increased consumption and higher real GDP demanded.

Explanation

1. Identify the effect of each option on real GDP demanded<br /> a. An increase in net taxes reduces disposable income, leading to decreased consumption and thus decreases real GDP demanded.<br /> b. An increase in money supply typically lowers interest rates, encouraging investment and increasing real GDP demanded.<br /> c. An increase in fiscal spending on infrastructure directly increases aggregate demand, raising real GDP demanded.<br /> d. An increase in transfer payments boosts disposable income, leading to increased consumption and higher real GDP demanded.
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