Exhibit 15-2

-Refer to the graph in the exhibit.Suppose the expansionary gap is eliminated.According to policymakers who favour an active approach to policy, where will the economy end up?
A) at point A
B) at point B
C) at point C
D) unknown

Question

Exhibit 15-2
 
-Refer to the graph in the exhibit.Suppose the expansionary gap is eliminated.According to policymakers who favour an active approach to policy, where will the economy end up?  
A) at point A 
B) at point B 
C) at point C 
D) unknown

Quizplus · Accepted Answer

Policymakers who favour an active approach to policy would use contractionary policy measures to eliminate an expansionary gap. This would involve decreasing government spending, increasing taxes, or increasing interest rates. These measures would shift the aggregate demand curve to the left, resulting in a lower level of real GDP and price level. The contractionary policy measures would move the economy from point B to point C, where the economy is in equilibrium at potential GDP. Therefore, the economy would end up at point C after the expansionary gap is eliminated.

Exhibit 15-2 -Refer to the Graph in the Exhibit.Suppose the Expansionary Gap