Refer to Figure 18.1 for the following questions.
Figure 18.1
-If the economy moves from A to B in Figure 18.1,which of the following would be the appropriate fiscal policy to achieve potential GDP?
A) Increase taxes
B) Increase government spending
C) Contractionary fiscal policy
D) Decrease interest rates

Question

Refer to Figure 18.1 for the following questions.
Figure 18.1 
-If the economy moves from A to B in Figure 18.1,which of the following would be the appropriate fiscal policy to achieve potential GDP?
A) Increase taxes 
B) Increase government spending 
C) Contractionary fiscal policy 
D) Decrease interest rates

Quizplus · Accepted Answer

Increasing government spending would stimulate the economy and help move it towards potential GDP. This is expansionary fiscal policy. Option A would be contractionary and inhibit economic growth, and option D is a monetary policy tool rather than fiscal policy. Option C is correct in terms of its label but does not provide guidance as to what specific policies to implement.

Refer to Figure 18.1 for the Following Questions