Table 18-1
$$\begin{array} { | c | c | c | c | }
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2013 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2014 & 14.5 \text { trillion } & 14.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 18-1.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should

Question

Table 18-1
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2013 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2014 & 14.5 \text { trillion } & 14.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 18-1.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should

Quizplus · Accepted Answer

Real GDP in 2014 is below potential GDP, indicating a recessionary gap. To close this gap and bring real GDP back to its potential level, expansionary fiscal policy is needed. The best choice from the given options is to decrease income taxes, which would increase disposable income and encourage consumer spending, increasing aggregate demand and stimulating economic growth. Decreasing government purchases or decreasing the money supply would have the opposite effect, reducing aggregate demand and deepening the recessionary gap. Increasing the level of interest rates would be a monetary policy action, which may or may not be effective in stimulating economic growth depending on the state of the economy. Thus, the best choice is A) decrease income taxes.

Table 18-1 -Refer to Table 18-1