Figure 16-2
-Refer to Figure 16-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by Congress and the president would be to
A)lower the discount rate of interest.
B)execute an open market sale of government securities.
C)increase government transfer payments.
D)increase marginal income tax rates.

Question

Figure 16-2 
-Refer to Figure 16-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by Congress and the president would be to
A)lower the discount rate of interest. 
B)execute an open market sale of government securities. 
C)increase government transfer payments. 
D)increase marginal income tax rates.

Quizplus · Accepted Answer

If the economy is at point A, it is experiencing a recessionary gap, which means that actual output is below potential output. To close this gap and stimulate economic growth, the appropriate fiscal policy would be expansionary, meaning that government spending should be increased and/or taxes should be decreased. One way to increase government spending is by increasing transfer payments, such as unemployment benefits. Therefore, choice C is the best option. Lowering discount rates (A) and executing open market sales of government securities (B) are both monetary policy tools that are used by the Federal Reserve, not Congress and the President. Increasing marginal income tax rates (D) would decrease disposable income and reduce consumer spending, which would further worsen the recessionary gap. Therefore, it is not an appropriate fiscal policy option in this scenario.

Figure 16-2 -Refer to Figure 16-2.In the Graph Above,if the Economy Is