Use the figure below to answer the following question(s).
Figure 11-2

-Refer to Figure 11-2.If an economy operates in the short run at point a,Keynesian analysis indicates that restrictive fiscal policy will
A)increase AD and move the economy toward point c.
B)decrease AD and move the economy toward point b.
C)increase SRAS and move the economy toward point b.
D)decrease SRAS and move the economy toward point c.

Question

Use the figure below to answer the following question(s).
Figure 11-2
 
-Refer to Figure 11-2.If an economy operates in the short run at point a,Keynesian analysis indicates that restrictive fiscal policy will
A)increase AD and move the economy toward point c. 
B)decrease AD and move the economy toward point b. 
C)increase SRAS and move the economy toward point b. 
D)decrease SRAS and move the economy toward point c.

Quizplus · Accepted Answer

At point a, the economy is producing below potential output (Yp) which indicates a recessionary gap. Restrictive fiscal policy which involves decreasing government spending and/or increasing taxes, would further decrease aggregate demand (AD) and move the economy towards point b, closing the gap between actual and potential output. Therefore, the correct choice is B.

Use the Figure Below to Answer the Following Question(s)