Define fiscal policy. Determine whether each of the following, other Factors held constant, would lead to an increase, a decrease, or no change in the level of real GDP demand:
a.A decrease in government purchase- a decrease in government purchase, especially during a recovery period, would lead to an increase in the level of GDP demand.
b.An increase in net taxes- an increase in net taxes would lead to a decrease in real GDPdemand.
c.A reduction in transfer payments- a reduction in transfer payments would not have any effect on the change in level of real GDP demand; however, the recipients of suchTransfer payments, by increasing personal consumption due to the receipt of transfer payments, results in an increase in the level of real GDP demand.
d.A decrease in the marginal propensity to consume- a decrease in the marginal propensity to consume will result in a decrease in the level of real GDP demand.

Fiscal policy is a policy employed by the government to influence aggregate demand in the economy by the use of government expenditure, revenue and taxation.

a. Decrease in real GDP

b. Decrease in real GDP

c. Decrease in real GDP

d. Decrease in real GDP

Explanation:

Definition of fiscal policy:

Fiscal policy is the use of government revenue, expenditure, and taxation to influence aggregate demand to achieve some targeted macroeconomic objectives, some of which are economic growth and development, stability in general price level, favorable balance of payment, e.t.c.

a.A decrease in government purchase

Decrease in government purchase is a reduction in government spending which is not an expansionary fiscal policy. Since it will reduce money supply, it will have a negative effect on real GDP.

b.An increase in net taxes

Increase in net tax reduces disposable income and purchasing power, this will decrease aggregate demand and reduce consumption and real GDP.

c.A reduction in transfer payments

Reduction in transfer payments will reduce purchasing power and by implication consumption and aggregate demand, this will decrease real GDP

d.A decrease in the marginal propensity to consume

Marginal propensity to consume (MPC) is that portion of increase in income consumers are ready to spend on goods and services. A decrease in marginal propensity to consume is a reduction in aggregate consumption by implication real GDP.