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

Question

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

Quizplus · Accepted Answer

Discretionary fiscal policy involves government actions such as changes in taxes or government spending to shift the aggregate demand curve. In this scenario, the output gap is negative, meaning that the economy is producing below potential output. To eliminate the gap and restore long-run equilibrium, the aggregate demand curve needs to be shifted to the right. Choice C is the only option that involves shifting the aggregate demand curve to the right, which would lead to a new equilibrium output level, Y_p, and a higher price level, P₂. The other options either involve shifting the short-run aggregate supply curve (which would not be effective in restoring long-run equilibrium) or shifting both the aggregate demand and short-run aggregate supply curve (which is unnecessary and would result in a higher price level than needed for long-run equilibrium).

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