If the economy is at an above full-employment equilibrium, ________ gap exists and discretionary fiscal policy that ________ will return real GDP to potential GDP.
A) an inflationary; increases aggregate demand
B) an inflationary; decreases aggregate demand
C) a recessionary; increases aggregate supply
D) a recessionary; decreases aggregate supply
E) a recessionary; decreases aggregate demand

Question

Quizplus · Accepted Answer

An above full-employment equilibrium indicates an inflationary gap, where output exceeds potential GDP. To return to potential GDP, discretionary fiscal policy should decrease aggregate demand, reducing inflationary pressures.

If the Economy Is at an Above Full-Employment Equilibrium, ________