Figure 16-5
-Refer to Figure 16-5.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue
A)expansionary fiscal policy.
B)contractionary fiscal policy.
C)expansionary monetary policy.
D)contractionary monetary policy.
E)contractionary automatic stabilizers.

Question

Figure 16-5 
-Refer to Figure 16-5.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue
A)expansionary fiscal policy. 
B)contractionary fiscal policy. 
C)expansionary monetary policy. 
D)contractionary monetary policy. 
E)contractionary automatic stabilizers.

Quizplus · Accepted Answer

The economy is in a recessionary gap at point A, with GDP below potential GDP, and is expected to move towards the long-run equilibrium at point B in the next year. The most appropriate policy response would be expansionary fiscal policy, such as increasing government spending or reducing taxes, to increase aggregate demand and close the output gap. Monetary policy may also be used, but it may not be as effective in such a situation, and contractionary policies would be counterproductive. Automatic stabilizers, such as unemployment benefits, would also help to mitigate the negative effects of the recession, but are not sufficient on their own.

Figure 16-5 -Refer to Figure 16-5.In the Dynamic Model of AD-AS in of AD-AS