Figure 12.2 Alt text for Figure 12.2: In figure 12.2, a graph comparing real GDP and price level.
Long description for Figure 12.2: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).3 lines are shown; AD, LRAS, and SRAS.Line AD begins at the top left corner and slopes down to the end of the x-axis.Line SRAS begins near the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects lines AD and SRAS at point A.
-Refer to Figure 12.2.In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to

Question

Figure 12.2  Alt text for Figure 12.2: In figure 12.2, a graph comparing real GDP and price level.
Long description for Figure 12.2: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).3 lines are shown; AD, LRAS, and SRAS.Line AD begins at the top left corner and slopes down to the end of the x-axis.Line SRAS begins near the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects lines AD and SRAS at point A.
-Refer to Figure 12.2.In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to

Quizplus · Accepted Answer

At point A, the economy is producing at its potential output level, but the price level is higher than the expected level. To combat the high price level, the federal government should increase transfer payments to households. This increase in transfer payments will boost consumer spending, which will shift the AD curve to the right, leading to an increase in real GDP and decreasing the price level. Therefore, the best choice is option C, i.e., increase government transfer payments. Options A, B, D, and E would have opposite effects on the economy's performance and not address the problem of high price levels at point A.

Figure 122 Alt Text for Figure 12