An expansionary policy:

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Starting with the question: An expansionary policy and the provided options.
Option a: 'Increases aggregate demand' — This is a classic description of expansionary policy. By lowering interest rates, increasing government spending, or cutting taxes, aggregate demand is boosted, stimulating output and employment in the short run.
Option b: 'Increases aggregate supply' — Expansionary policy primarily targets demand-side factors. While supply conditions can respond over time (e.g., through investment improving capital stock), the immediate and textbook effect of expansionary policy is not to shift aggregate supply rightward.
Option c: 'Increases full employment' — Expansionary measures aim to raise aggregate demand and output; they do not guarantee full employment, especially if the economy is near or at potential output. Unemployment may fall, but claiming that full employment is always achieved is overly strong and depends on context such as structural factors and the Phillips curve trade-offs.
Option d: 'Decreases the price level' — Expansive monetary or fiscal actions tend to raise or, at best, stabilize the price level in the short run due to higher demand. A decrease in the price level is not the typical outcome; in many models, inflationary pressure may increase or the price level may rise rather than fall.
Narrative summary: The core mechanism of expansionary policy is to stimulate demand components so that overall spending rises. The other options describe effects that are either secondary, context-dependent, or contrary to the primary aim of expansionary policy.

Dashboard Term 2 Non-assesable Multiple Choice Question Quiz - The Circular Flow Model

An expansionary policy:

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