The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is most likely to pursue a policy of
A) increasing government spending to decrease aggregate demand.
B) decreasing the money supply to decrease 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

When the GDP is above potential output, it indicates an overheated economy that could lead to inflation. To cool down the economy and decrease aggregate demand, the government or central bank might decrease the money supply, which can help bring the economy back to its long-run equilibrium. This is achieved by making borrowing more expensive and reducing spending.

The GDP for the Nation of Economia Is Currently Above