Figure 16-1
-Refer to Figure 16-1. If the closed economy is at point b, which of the following is the best policy to restore full employment?
A) increasing the money supply
B) decreasing government purchases
C) increasing taxes
D) selling Canadian dollars

Question

Figure 16-1 
-Refer to Figure 16-1. If the closed economy is at point b, which of the following is the best policy to restore full employment?
A) increasing the money supply 
B) decreasing government purchases 
C) increasing taxes 
D) selling Canadian dollars

Quizplus · Accepted Answer

If the economy is at point b, then it is operating below potential GDP, indicating a recessionary gap. To restore full employment, the AD curve needs to shift to the right. Increasing the money supply would lower interest rates, which would encourage consumption and investment spending, ultimately increasing AD and restoring full employment. Decreasing government purchases or increasing taxes would decrease AD, exacerbating the recessionary gap. Selling Canadian dollars would not have a direct effect on AD in the closed economy.

Figure 16-1 -Refer to Figure 16-1. If the Closed Economy Is at Economy