The graph shown displays various economic outcomes. Assuming the economy is currently at equilibrium A, the government would likely enact _______ fiscal policy in an effort to move aggregate demand to the _______.

Question

The graph shown displays various economic outcomes.  Assuming the economy is currently at equilibrium A, the government would likely enact _______ fiscal policy in an effort to move aggregate demand to the _______.

Quizplus · Accepted Answer

At equilibrium A, the economy is experiencing a recessionary gap, with lower than optimal levels of output and employment. To address this, the government would enact expansionary fiscal policy, which involves increasing government spending and/or reducing taxes to stimulate aggregate demand and push the economy to the right towards potential output. Choice B) is incorrect because contractionary fiscal policy, which involves reducing government spending and/or increasing taxes, would further decrease aggregate demand and worsen the recessionary gap. Choices C) and D) are also incorrect as they suggest expansionary policy would move aggregate demand to the left, which is the opposite of the intended goal.

The Graph Shown Displays Various Economic Outcomes