Use the following to answer questions:
-(Figure: Fiscal Policy Choices) Refer to Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (b) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Question

Use the following to answer questions:

-(Figure: Fiscal Policy Choices) Refer to Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (b) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Quizplus · Accepted Answer

When real GDP is at Y₁, the economy is in a high inflationary gap. To reduce inflation and shift the aggregate demand curve to the left, the government is likely to reduce government spending and increase taxes. Therefore, the best choice is C: reduced government spending and increased taxes.

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