Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) 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

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2 
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) 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. The other options would either decrease aggregate demand or have no significant effect.

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