The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-6 Refer to Figure 24-6.In the initial short-run equilibrium,there is ________ output gap of ________,but this gap could be closed by a ________.
A)a recessionary; 100; fiscal contraction
B)a recessionary; 200; fiscal expansion
C)a recessionary; 200; fiscal contraction
D)an inflationary; 100; fiscal contraction
E)an inflationary; 200; fiscal expansion

Question

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.  FIGURE 24-6 Refer to Figure 24-6.In the initial short-run equilibrium,there is ________ output gap of ________,but this gap could be closed by a ________.
A)a recessionary; 100; fiscal contraction 
B)a recessionary; 200; fiscal expansion 
C)a recessionary; 200; fiscal contraction 
D)an inflationary; 100; fiscal contraction 
E)an inflationary; 200; fiscal expansion

Quizplus · Accepted Answer

In the initial short-run equilibrium at point A, the economy is producing 100 less than the potential output (which is represented by the vertical line at the long-run equilibrium). This is a recessionary output gap. To close this gap, the aggregate demand needs to increase, which means fiscal expansion is needed. Therefore, the correct answer is B, which states that the output gap is 200 and could be closed by a fiscal expansion.

The Diagram Below Shows an AD/AS Model for a Hypothetical