If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply?

Question

Quizplus · Accepted Answer

An increase in government purchases (such as infrastructure spending or increasing funding for education and healthcare) would increase aggregate demand and shift it to the right, helping to close the output gap and bring the economy back to potential real GDP. Option A refers to monetary policy, not fiscal policy, and may not be effective in increasing output in the long run. Option C (increase in oil prices) would increase production costs and result in a leftward shift in aggregate supply, leading to higher prices but not necessarily increased output. Option D (increase in taxes) would lead to a decrease in consumption and investment spending, resulting in a contractionary effect on the economy. Option E (decrease in the supply of government services) would also have a contractionary effect on the economy, reducing aggregate demand and output even further.

If the Economy Is Falling Below Potential Real GDP, Which