Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to decrease taxes by
A)$500 billion.
B)less than $500 billion.
C)more than $500 billion.
D)None of the above are correct.Congress should raise taxes in this case.

Question

Quizplus · Accepted Answer

Since the economy is already producing at a level below potential GDP, a decrease in taxes would increase aggregate demand and stimulate economic growth. To restore the economy to potential GDP, the decrease in taxes needed would be less than the difference between real and potential GDP, which is $500 billion. Therefore, the correct answer is B.

Suppose Real GDP Is $13 Trillion,potential Real GDP Is $13