The economy is growing far too quickly, as high aggregate demand is causing inflation. a. What fiscal policy should be pursued in this instance? fiscal policy. b. What will be the effect of the appropriate policy on aggregate demand? Aggregate demand will shift to the .

When the economy is growing too fast and the inflation is high, Contractionary fiscal policy should be pursued. Contractionary fiscal policy entails either government increasing tax or reducing its spending or both.

When taxed are increased, the household disposable income will be reduced, households will have lesser money to spend and also the business profit will be reduced and this will lead to reduced investments. This policy will relax the aggregate demand and ultimately the interest rate.

Since the aggregate demand will reduce after pursuing this policy, aggregate demand will shift to the left