Figure 11.1 shows the relationship between the price level and the real GDP. Which of the following sets of policies would unambiguously move the economy to full employment?

A) Increase in government purchases, increase in taxes, and decrease in transfer payments
B) Decrease in government purchases, increase in taxes, and decrease in transfer payments
C) Increase in government purchases, decrease in taxes, and increase in transfer payments
D) Increase in government purchases, increase in taxes, and increase in transfer payments
E) Decrease in government purchases, decrease in taxes, and decrease in transfer payments

Question

Figure 11.1 shows the relationship between the price level and the real GDP. Which of the following sets of policies would unambiguously move the economy to full employment?

A) Increase in government purchases, increase in taxes, and decrease in transfer payments 
B) Decrease in government purchases, increase in taxes, and decrease in transfer payments 
C) Increase in government purchases, decrease in taxes, and increase in transfer payments 
D) Increase in government purchases, increase in taxes, and increase in transfer payments 
E) Decrease in government purchases, decrease in taxes, and decrease in transfer payments

Quizplus · Accepted Answer

According to the diagram, to move the economy to full employment, we need an increase in output (real GDP) and a decrease in the price level. An increase in government purchases would increase aggregate demand and output, while a decrease in taxes would increase disposable income and consumption, also increasing aggregate demand and output. Meanwhile, an increase in transfer payments would also increase disposable income and consumption. Together, these policies would shift the aggregate demand curve to the right, increasing output and reducing the unemployment rate.

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