Figure 11.1 shows the relationship between the price level and the real GDP.Which of the following sets of policies would unambiguously move the economy to full employment?
Figure 11.1

A)Increase in government purchases,increase in taxes,and decrease in transfer payments
B)Decrease in government purchases,increase in taxes,and decrease in transfer payments
C)Increase in government purchases,decrease in taxes,and increase in transfer payments
D)Increase in government purchases,increase in taxes,and increase in transfer payments
E)Decrease in government purchases,decrease in taxes,and decrease in transfer payments

Question

​Figure 11.1 shows the relationship between the price level and the real GDP.Which of the following sets of policies would unambiguously move the economy to full employment? ​
Figure 11.1​

A)Increase in government purchases,increase in taxes,and decrease in transfer payments 
B)Decrease in government purchases,increase in taxes,and decrease in transfer payments 
C)Increase in government purchases,decrease in taxes,and increase in transfer payments 
D)Increase in government purchases,increase in taxes,and increase in transfer payments 
E)Decrease in government purchases,decrease in taxes,and decrease in transfer payments

Quizplus · Accepted Answer

An increase in government purchases would shift the aggregate demand (AD) curve to the right, leading to higher output and higher prices. A decrease in taxes would increase disposable income and consumer spending, further shifting AD curve to the right. An increase in transfer payments would also increase disposable income and consumption, but might not have a large effect on output. Therefore, policies in choice C would unambiguously move the economy to full employment by increasing AD and stimulating output. Policies in other choices either decrease AD or have mixed effects on AD, making it less certain whether they would lead to full employment.

​Figure 11

Figure 11