Figure 18-2

-Refer to Figure 18-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to

Question

Figure 18-2
 
-Refer to Figure 18-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to

Quizplus · Accepted Answer

If the economy is at point A, it is in a recessionary gap, where aggregate demand is less than potential output. To increase aggregate demand, fiscal policy needs to be expansionary. One way to achieve this is by increasing government transfer payments, which will increase disposable income and consumption expenditures, leading to a multiplier effect on aggregate demand. Lowering the discount rate of interest (choice A) and executing an open market sale of government securities (choice B) are both monetary policy tools, not fiscal policy. Increasing marginal income tax rates (choice D) would decrease disposable income and consumption expenditures, leading to a contractionary effect on the economy, which would be inappropriate in a recessionary gap.

Figure 18-2 -Refer to Figure 18-2.In the Graph Above,if the Economy Is