Table 7-1
Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.
-Refer to Table 7-1. If policymakers choose to close the gap by using stabilization policy, they should use
A) contractionary fiscal or monetary policies.
B) expansionary fiscal or monetary policies.
C) a combination of contractionary fiscal and expansionary monetary policies.
D) a combination of expansionary fiscal and contractionary monetary policies.

Question

Table 7-1
  Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.
-Refer to Table 7-1. If policymakers choose to close the gap by using stabilization policy, they should use
A) contractionary fiscal or monetary policies. 
B) expansionary fiscal or monetary policies. 
C) a combination of contractionary fiscal and expansionary monetary policies. 
D) a combination of expansionary fiscal and contractionary monetary policies.

Quizplus · Accepted Answer

The economy is currently producing output below its potential level, indicating a recessionary gap. To close this gap and increase output, policymakers should use expansionary fiscal or monetary policies. Expansionary fiscal policy involves increasing government spending and/or decreasing taxes, which stimulates aggregate demand. Expansionary monetary policy involves lowering interest rates and increasing the money supply, which also stimulates aggregate demand. A combination of expansionary fiscal and monetary policies may be even more effective in closing the gap and promoting economic growth. Contractionary fiscal or monetary policies, on the other hand, would only further decrease aggregate demand and worsen the recessionary gap.

Table 7-1 Table 7-1 Shows the Aggregate Demand and Short-Run