If real equilibrium GDP is above potential GDP,expansionary fiscal policy should be pursued.

Question

Quizplus · Accepted Answer

If real equilibrium GDP is above potential GDP, it means the economy is running hot and there is a risk of inflation. Pursuing expansionary fiscal policy in this situation could overheat the economy by increasing demand further, leading to further inflationary pressures. In such a situation, contractionary fiscal policy would be more appropriate to cool down the economy and bring it back to its potential GDP level.

If Real Equilibrium GDP Is Above Potential GDP,expansionary Fiscal Policy