The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor an active approach to policy,once the expansionary gap is eliminated,the economy can attain equilibrium at:

A)point A.
B)point B.
C)point C.
D)a point above point A on the SRAS curve.
E)at a point below point C on the SRAS curve.

Question

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor an active approach to policy,once the expansionary gap is eliminated,the economy can attain equilibrium at:
​

A)point A. 
B)point B. 
C)point C. 
D)a point above point A on the SRAS curve. 
E)at a point below point C on the SRAS curve.

Quizplus · Accepted Answer

Point C represents the intersection of the SRAS and LRAS curves at the potential output level, which is the level of output that can be sustained in the long run without causing inflation. Once the expansionary gap is eliminated, the economy should aim to return to potential output level to ensure a sustainable level of growth without inflationary pressures. Therefore, an active approach to policy should focus on achieving equilibrium at point C.

The Figure Below Shows the Price Level,real GDP,and the Potential