Use the following to answer questions:
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is AD'':
A) the economy is in long-run equilibrium.
B) an expansionary fiscal policy may be warranted.
C) a contractionary fiscal policy may be warranted.
D) the economy is in a recessionary gap.

Question

Use the following to answer questions: 
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is AD'':
A) the economy is in long-run equilibrium. 
B) an expansionary fiscal policy may be warranted. 
C) a contractionary fiscal policy may be warranted. 
D) the economy is in a recessionary gap.

Quizplus · Accepted Answer

If the aggregate demand curve is at AD'', it suggests that the economy is producing beyond its potential output, indicating an inflationary gap. Therefore, a contractionary fiscal policy may be warranted to reduce aggregate demand and bring the economy back to long-run equilibrium.

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