If the economy is in equilibrium with real GDP less than potential GDP,there is ________ gap,and a fiscal policy that ________ is appropriate.

Question

Quizplus · Accepted Answer

If the economy is in equilibrium with real GDP less than potential GDP, then it is a recessionary gap. To close this gap, we need to increase aggregate demand, and thus, a fiscal policy that increases aggregate demand is appropriate. Options A and B suggest decreasing potential GDP or decreasing aggregate demand, respectively, which would be counterproductive in this situation. Option C suggests an inflationary gap, which is not the situation described in the question. Therefore, option D is the best choice.

If the Economy Is in Equilibrium with Real GDP Less