Figure 16-2
-Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 16-2 from D₀D₀ to D₁D₁.Fiscal authorities who wish to restore real GDP to the full-employment level will

Question

Figure 16-2

-Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 16-2 from D₀D₀ to D₁D₁.Fiscal authorities who wish to restore real GDP to the full-employment level will

Quizplus · Accepted Answer

A contractionary monetary policy will decrease aggregate demand, resulting in a recessionary gap. To restore real GDP to the full-employment level, fiscal authorities should use expansionary fiscal policy, either by cutting taxes or increasing government spending, which will increase aggregate demand and close the gap. Running a budget surplus by increasing taxes or cutting government spending (choice A) would only worsen the recessionary gap. Running a balanced budget (choice B) would do nothing to address the recessionary gap. Ignoring the change in monetary policy (choice D) would be irresponsible and would not help to restore real GDP to full employment.

Figure 16-2 -Assume That a Contractionary Monetary Policy Has Shifted the Aggregate