If the economy is falling below potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
A)the money supply and a decrease in interest rates.
B)government purchases.
C)oil prices.
D)taxes.

Question

Quizplus · Accepted Answer

To bring the economy back to its long-run aggregate supply, an appropriate fiscal policy would be to increase government purchases. This would result in an increase in aggregate demand and ultimately lead to an increase in the level of output, employment, and prices. Increasing the money supply and decreasing interest rates would be a monetary policy action, and changing oil prices is not within the control of fiscal policy. Decreasing taxes may stimulate consumption, but it may not necessarily lead to an increase in production and employment, as the problem lies in insufficient overall demand at the macroeconomic level. Therefore, the best choice would be to increase government purchases as that directly increases aggregate demand.

If the Economy Is Falling Below Potential Real GDP,which of the Following