Figure 11.1 shows the relationship between the price level and the real GDP. If the government wants the economy to be at full employment, it should _____.

A) increase taxes
B) decrease transfer payments
C) decrease government purchases
D) wait for the SRAS curve to shift to the left
E) increase its purchases

Question

Figure 11.1 shows the relationship between the price level and the real GDP. If the government wants the economy to be at full employment, it should _____.

A) increase taxes 
B) decrease transfer payments 
C) decrease government purchases 
D) wait for the SRAS curve to shift to the left 
E) increase its purchases

Quizplus · Accepted Answer

According to the graph, full employment is achieved at a real GDP level of Yfe. To reach this level, the government should increase its purchases, which will shift the AD curve to the right, leading to an increase in real GDP and possibly a higher price level. Decreasing transfer payments, decreasing government purchases, or waiting for the SRAS curve to shift to the left would all lead to a decrease in real GDP and move the economy further away from full employment. Increasing taxes would decrease aggregate demand and also lead to a decrease in real GDP.

Figure 111 Shows the Relationship Between the Price Level and the the Real