Figure 27-4

-Refer to Figure 27-4.Given that the economy has moved from A to B in the graph above,which of the following would be the appropriate fiscal policy to achieve potential GDP?

Question

Figure 27-4
 
-Refer to Figure 27-4.Given that the economy has moved from A to B in the graph above,which of the following would be the appropriate fiscal policy to achieve potential GDP?

Quizplus · Accepted Answer

The economy has moved from point A to point B, indicating a recessionary gap. To achieve potential GDP, expansionary fiscal policy is needed. Increasing government spending can lead to an increase in aggregate demand, which can close the gap and reach potential output. Thus, the appropriate fiscal policy would be to increase government spending. Choice A (increase taxes) and C (contractionary fiscal policy) would decrease aggregate demand and worsen the gap. Choice D (decrease interest rates) would be appropriate for monetary policy, not fiscal policy.

Figure 27-4 -Refer to Figure 27-4.Given That the Economy Has Moved from Economy