Figure 12-1
-Refer to Figure 12-1. If discretionary fiscal policy is used to eliminate the gap, policy actions Jwill

Question

Figure 12-1 
-Refer to Figure 12-1. If discretionary fiscal policy is used to eliminate the gap, policy actions Jwill

Quizplus · Accepted Answer

To eliminate the gap and restore long-run equilibrium, discretionary fiscal policy should be used to shift the aggregate demand curve to the right until it intersects with the long-run aggregate supply curve at potential GDP. This would result in a new equilibrium at point S1U1B12, with a price level of PS1U1B12 and output level of YS1U1B1pS1U1B0. Shifting the short-run aggregate supply curve to the right (option B) would only lead to a temporary increase in output, and shifting both the aggregate demand and short-run aggregate supply curves (option D) may lead to an uncertain impact on the price level and could result in a new equilibrium at a level of output greater or less than potential GDP.

Figure 12-1 -Refer to Figure 12-1. If Discretionary Fiscal Policy Is Used