The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-6
-Refer to Figure 24-6.In the initial short-run equilibrium,there is ________ output gap of ________ but this gap could be closed by a ________.
A)a recessionary; 100; fiscal contraction
B)a recessionary; 200; fiscal expansion
C)a recessionary; 200; fiscal contraction
D)an inflationary; 100; fiscal contraction
E)an inflationary; 200; fiscal expansion

Question

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.  FIGURE 24-6
-Refer to Figure 24-6.In the initial short-run equilibrium,there is ________ output gap of ________ but this gap could be closed by a ________.
A)a recessionary; 100; fiscal contraction 
B)a recessionary; 200; fiscal expansion 
C)a recessionary; 200; fiscal contraction 
D)an inflationary; 100; fiscal contraction 
E)an inflationary; 200; fiscal expansion

Quizplus · Accepted Answer

In the initial short-run equilibrium, there is a recessionary output gap of 200 (the distance between point A and the potential GDP line). This gap could be closed by a fiscal expansion, which would shift the AD curve to the right, increasing output and employment. Therefore, the best choice is B, which suggests a recessionary output gap of 200 and a fiscal expansion as a policy response. The other options either suggest the wrong type of output gap (inflationary instead of recessionary) or the wrong policy response (fiscal contraction instead of expansion).

The Diagram Below Shows an AD/AS Model for a Hypothetical