Figure 16-7
-Refer to Figure 16-7. At point 4, if policymakers are concerned about economic performance, they will most likely respond by
A) increasing government purchases and the money supply.
B) increasing taxes.
C) decreasing aggregate demand.
D) having the Fed sell bonds.

Question

Figure 16-7 
-Refer to Figure 16-7. At point 4, if policymakers are concerned about economic performance, they will most likely respond by
A) increasing government purchases and the money supply. 
B) increasing taxes. 
C) decreasing aggregate demand. 
D) having the Fed sell bonds.

Quizplus · Accepted Answer

At point 4, the economy is in a recessionary gap with output below potential and unemployment above the natural rate. Policymakers will want to increase aggregate demand to close the gap and restore full employment. They can do this by increasing government purchases, which will increase government spending and aggregate demand. Additionally, policymakers can increase the money supply through expansionary monetary policy, which lowers interest rates and stimulates investment and consumption spending. Therefore, choice A is the best option.

Figure 16-7 -Refer to Figure 16-7. at Point 4, If Policymakers Are