For the following questions, consult the diagram below.
Figure 15-2
-Refer to Figure 15-2. If the closed economy is at point b, which of the following is the best policy to restore full employment?
A)increasing the money supply
B)decreasing government purchases
C)increasing taxes
D)selling Canadian dollars

Question

For the following questions, consult the diagram below.
Figure 15-2 
-Refer to Figure 15-2. If the closed economy is at point b, which of the following is the best policy to restore full employment?
A)increasing the money supply 
B)decreasing government purchases 
C)increasing taxes 
D)selling Canadian dollars

Quizplus · Accepted Answer

If the economy is at point b, it is below the full employment level of output (Yfe). To restore full employment, the aggregate demand needs to be increased. The best policy to increase aggregate demand is to increase the money supply, which will lead to a decrease in interest rates, an increase in investment and consumption spending, and an increase in aggregate demand. Decreasing government purchases or increasing taxes would decrease aggregate demand, and selling Canadian dollars would not have a direct impact on aggregate demand.

For the Following Questions, Consult the Diagram Below