Figure 11-1

-In Figure 11-1, to achieve equilibrium at potential GDP, the government could
A)increase taxes.
B)decrease transfer payments.
C)increase government purchases.
D)None of the above is correct.

Question

Figure 11-1
​ 
-In Figure 11-1, to achieve equilibrium at potential GDP, the government could
A)increase taxes. 
B)decrease transfer payments. 
C)increase government purchases. 
D)None of the above is correct.

Quizplus · Accepted Answer

To achieve equilibrium at potential GDP, the government would need to increase aggregate demand. One way to do this is by increasing government purchases, as this would increase government spending and therefore increase overall demand in the economy. Option A, increasing taxes, would decrease consumer spending and aggregate demand, moving the economy further away from equilibrium. Option B, decreasing transfer payments, would decrease overall income and consumer spending, also moving the economy further away from equilibrium.

Figure 11-1 ​

Figure 11-1