Figure 32-2

Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 32-2 from D₀D₀ to D₁D₁. Fiscal authorities who wish to restore real GDP to the full-employment level will

Question

Figure 32-2

Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 32-2 from D₀D₀ to D₁D₁. Fiscal authorities who wish to restore real GDP to the full-employment level will

Quizplus · Accepted Answer

A contractionary monetary policy reduces aggregate demand, causing a decrease in real GDP and potentially leading to a recession. To counteract this, fiscal authorities can implement expansionary fiscal policy, either in the form of tax cuts or increased government spending, to boost aggregate demand and restore full-employment real GDP. Running a budget deficit allows for this expansionary policy, while running a surplus would have the opposite effect and could worsen the recession. A balanced budget would not provide the necessary stimulus to counter the effects of the contractionary monetary policy. Ignoring the change in monetary policy would be detrimental to the economy.

Figure 32-2 Assume That a Contractionary Monetary Policy Has Shifted the Aggregate