If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:
A) a decrease in government transfers.
B) an increase in government spending.
C) a decrease in government spending.
D) an increase in the money supply to decrease interest rates.

Question

Quizplus · Accepted Answer

When consumption spending decreases due to a fall in consumer confidence, increasing government spending can help offset the decrease in aggregate demand, helping to keep the economy at its potential output.

If the Economy Is at Potential Output and Consumption Spending