Figure 7-7
-Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?
A) Decrease government welfare spending
B) Decrease personal income taxes
C) Decrease government spending on defense
D) Increase payroll taxes

Question

Figure 7-7 
-Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?
A) Decrease government welfare spending 
B) Decrease personal income taxes 
C) Decrease government spending on defense 
D) Increase payroll taxes

Quizplus · Accepted Answer

Decreasing personal income taxes would increase disposable income and therefore increase consumption, shifting the aggregate demand curve to the right and closing the output gap at K. Decreasing government welfare spending, decreasing spending on defense, and increasing payroll taxes would all reduce aggregate demand and would not help to close the output gap.

Figure 7-7 -Refer to Figure 7-7. Suppose the Economy Is Initially in Is