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Figure: Policy Alternatives
-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. In panel (b) , the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the government decides to intervene, it will MOST likely:

Question

Use the following to answer questions:
Figure: Policy Alternatives

-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. In panel (b) , the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the government decides to intervene, it will MOST likely:

Quizplus · Accepted Answer

The economy is in a recessionary gap (where actual output is less than potential output), so expansionary fiscal policy is needed to shift the aggregate demand curve to the right and increase output. The government can do this by increasing its spending (shown as a shift to the right of the AD curve in panel (b) of the figure).

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