Table 12.2
-Refer to Table 12.2.Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2017 and in 2018 if the federal government does not use fiscal policy.If the federal government wants to keep real GDP at its potential level in 2018, it should

Question

Table 12.2 
-Refer to Table 12.2.Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2017 and in 2018 if the federal government does not use fiscal policy.If the federal government wants to keep real GDP at its potential level in 2018, it should

Quizplus · Accepted Answer

If the federal government wants to keep real GDP at its potential level in 2018, it should try to increase aggregate demand through a fiscal policy measure. Among the given options, decreasing income taxes will increase disposable income, which will increase consumption expenditure, and ultimately increase aggregate demand that matches the potential real GDP level in 2018. On the contrary, decreasing government purchases, decreasing the money supply, increasing the level of interest rates, and increasing employment insurance payments, can reduce aggregate demand, leading to a gap between real GDP and potential GDP.

Table 12.2 -Refer to Table 12.2.Consider the Hypothetical Information in the Table