The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is likely to pursue a policy of
A) increasing government spending to increase aggregate demand.
B) decreasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Question

Quizplus · Accepted Answer

If the GDP for Economia is currently below potential output, it indicates a shortfall in aggregate demand. To increase aggregate demand and move towards long-run equilibrium, the government of Economia should pursue expansionary policies, such as increasing government spending. This will inject more money into the economy, creating more consumption and investment, which would eventually increase the GDP level closer to potential output.

The GDP for the Nation of Economia Is Currently Below