If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
A) increase government purchases; AD; left
B) increase transfer payments; AS; right
C) increase tax rates; AD; right
D) increase government purchases; AD; right

Question

Quizplus · Accepted Answer

If the actual output is below potential output, this implies that there is a recessionary gap. To close this gap, policymakers need to increase aggregate demand (AD) to align it with potential output. The appropriate fiscal policy response is to increase government purchases, which will shift the AD curve to the right. Therefore, the correct answer is choice D.

If the Actual Output Lies Below Potential Output, Then an Appropriate