If real equilibrium GDP is below the long-run aggregate supply curve, an appropriate fiscal policy would be to:
A)increase government purchases and increase a budget deficit.
B)pursue a contractionary fiscal policy by increasing the budget surplus.
C)increase individual income taxes to balance the budget.
D)increase business income taxes to increase tax fairness.

Question

Quizplus · Accepted Answer

If real equilibrium GDP is below the long-run aggregate supply curve, it indicates a recessionary gap, which means that the economy is operating below its potential output. To close this gap and bring the economy back to full employment, expansionary fiscal policy is needed. Increasing government purchases would increase aggregate demand, leading to an increase in output and employment. Additionally, increasing the budget deficit would provide a further boost to aggregate demand by injecting more money into the economy. Therefore, option A is the best choice.

If Real Equilibrium GDP Is Below the Long-Run Aggregate Supply