The figure above shows an economy's aggregate demand curve, aggregate supply curve, and potential GDP.
-In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must decrease government expenditure by ________ $1 trillion and/or increase taxes by ________ $1 trillion.
A) recessionary; more than; more than
B) inflationary; less than; more than
C) inflationary; exactly; exactly
D) inflationary; less than; less than
E) recessionary; less than; less than

Question

The figure above shows an economy's aggregate demand curve, aggregate supply curve, and potential GDP.
-In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must decrease government expenditure by ________ $1 trillion and/or increase taxes by ________ $1 trillion.
A) recessionary; more than; more than 
B) inflationary; less than; more than 
C) inflationary; exactly; exactly 
D) inflationary; less than; less than 
E) recessionary; less than; less than

Quizplus · Accepted Answer

To combat inflationary gaps, the government should decrease spending or increase taxes by less than the gap amount due to the multiplier effect.

The Figure Above Shows an Economy's Aggregate Demand Curve, Aggregate