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Figure: Aggregate Demand and Fiscal Policy
-(Figure: Aggregate Demand and Fiscal Policy)Refer to the figure.In the best case scenario,an economy in a recession at point Y would use fiscal policy to increase spending growth to:
A) 5%.
B) 7%.
C) 15%.
D) 10%.

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Figure: Aggregate Demand and Fiscal Policy 
-(Figure: Aggregate Demand and Fiscal Policy)Refer to the figure.In the best case scenario,an economy in a recession at point Y would use fiscal policy to increase spending growth to:
A) 5%. 
B) 7%. 
C) 15%. 
D) 10%.

Quizplus · Accepted Answer

At point Y, the economy is producing below potential GDP, which means there is a recession. To stimulate economic growth and close the output gap, fiscal policy should be used to increase aggregate demand. According to the figure, a fiscal policy that increases spending growth by 2 percentage points would shift the AD curve to the right and close the output gap. Since the initial growth rate is 3%, an increase of 2 percentage points would result in a new growth rate of 5%. Therefore, the correct choice is D.

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