Question

When aggregate demand is low enough to drive unemployment above the natural rate:_____.
a. there is downward pressure on the price level and the government may want to conduct expansionary fiscal policy.
b. there is downward pressure on the price level and the government may want to conduct contractionary fiscal policy.
c. there is upward pressure on the price level and the government may want to conduct contractionary fiscal policy.
d. the economy is entering into an expansion and the government may want to conduct contractionary fiscal policy.
e. there is upward pressure on the price level and the government may want to conduct expansionary fiscal policy.

Answer 1

Answer: a. there is downward pressure on the price level and the government may want to conduct expansionary fiscal policy.

Explanation:

With such a low aggregate demand curve, the equilibrium price which is where the Aggregate demand curve intersects the Aggregate Supply curve will be lower which will led to a downward pressure on the price level.

With such low aggregate demand and prices which will lead to increased unemployment over the natural rate, the Government would need to stimulate the Economy and can do this by embarking on an expansionary fiscal policy.

With this they can increase spending or reduce taxes which will increase income levels thereby increasing demand and thus lead to more companies opening up and hiring more people.