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.The government could close the existing output gap by
A)increasing the net tax rate.
B)decreasing the net tax rate.
C)decreasing government purchases.
D)decreasing government transfer payments.
E)implementing a contractionary fiscal policy.

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.The government could close the existing output gap by
A)increasing the net tax rate. 
B)decreasing the net tax rate. 
C)decreasing government purchases. 
D)decreasing government transfer payments. 
E)implementing a contractionary fiscal policy.

Quizplus · Accepted Answer

To close the output gap, the government needs to increase aggregate demand. This can be achieved through a decrease in net tax rate, which will increase disposable income and therefore, consumer spending.

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