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 experiencing a recessionary gap, where real GDP is below potential GDP. To close this gap and increase output, the federal government should use expansionary fiscal policy, which involves increasing government expenditures. This will shift the aggregate demand (AD) curve to the right, leading to an increase in both output and the price level. Options A, B, D, and E are not appropriate in this scenario. Decreasing the required reserve ratio (A) would be a monetary policy action, and selling government securities (B) would also be a monetary policy action that would decrease the money supply, making it harder for firms to borrow and invest. Decreasing transfer payments (D) and increasing the marginal income tax rate for the 1% (E) would both reduce aggregate demand, worsening the recessionary gap.

Figure 122 Alt Text for Figure 12