Figure 12-1

-Refer to Figure 12-1.In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

Question

Figure 12-1
 
-Refer to Figure 12-1.In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

Quizplus · Accepted Answer

Increasing government spending will directly increase aggregate demand, which will help close the output gap. Option A may encourage savings, but that would reduce spending and worsen the output gap. Option C could lower businesses' cost of production, but it may have negative externalities and might lead to more pollution. Option D (raising interest rates) would reduce aggregate demand and could actually worsen the output gap.

Figure 12-1 -Refer to Figure 12-1.In This Situation, If Policymakers Want to If