Exhibit 16-2

-Refer to Exhibit 16.2, which shows the price level, real GDP, and potential output for an economy. According to those who favor an active approach to policy, once the expansionary gap is eliminated, the economy can attain equilibrium at _____
A) point A.
B) point B.
C) point C.
D) a point above point A on the SRAS curve.
E) a point below point C on the SRAS curve.

Question

Exhibit 16-2
 
-Refer to Exhibit 16.2, which shows the price level, real GDP, and potential output for an economy. According to those who favor an active approach to policy, once the expansionary gap is eliminated, the economy can attain equilibrium at _____
A) point A. 
B) point B. 
C) point C. 
D) a point above point A on the SRAS curve. 
E) a point below point C on the SRAS curve.

Quizplus · Accepted Answer

According to those who favor an active approach to policy, the expansionary gap should be eliminated through contractionary fiscal or monetary policy, bringing the economy back to potential output. At this point, the economy can attain equilibrium at the intersection of the AD and LRAS curves, which is point C in the exhibit. At point C, the price level is stable, and real GDP equals potential output. Thus, the correct choice is C.

Exhibit 16-2 -Refer to Exhibit 16.2, Which Shows the Price Level, Real