In Figure 8.5,according to Keynesians,if equilibrium real output is Q₁ and full-employment real output is Q₂,an appropriate fiscal policy lever would be to A)Increase AD by increasing income taxes. B)Increase AD by increasing government spending. C)Increase AS by reducing government regulations. D)Reduce AS by tightening air pollution standards to improve air quality.

Question

Quizplus · Accepted Answer

According to Keynesians, when equilibrium output is below full-employment output, it means there is a deficiency in aggregate demand (AD). Therefore, to correct this, an appropriate fiscal policy lever would be to increase AD. The best option for increasing AD is to increase government spending, which would stimulate overall demand in the economy and help to close the output gap. Increasing income taxes would have the opposite effect by reducing disposable income and decreasing demand. Reducing government regulations may improve the efficiency of markets, but it would not directly increase AD. Tightening air pollution standards would increase costs for businesses, potentially leading to a decrease in supply and a decrease in AD.