Exhibit 17-1
-According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?
A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)The Fed or the government should act to shift the aggregate demand curve to the right.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question

Exhibit 17-1 
-According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?
A)The SRAS curve will shift to the left. 
B)The SRAS curve will shift to the right. 
C)The Fed or the government should act to shift the aggregate demand curve to the right. 
D)Either the money supply or government spending should be decreased. 
E)Aggregate demand should be decreased.

Quizplus · Accepted Answer

Those who favor an active approach to policy would suggest that the Fed or the government should act to shift the aggregate demand curve to the right in order to increase output and attain equilibrium at potential output. This could be done through expansionary fiscal or monetary policy, such as increasing government spending or lowering interest rates to stimulate demand. Option A is incorrect because shifting the SRAS curve to the left would further decrease output and move the economy further away from potential output. Option B is incorrect because shifting the SRAS curve to the right would increase output, but it would not necessarily bring the economy to potential output. Option D is incorrect because decreasing the money supply or government spending would decrease aggregate demand and move the economy further away from potential output. Option E is also incorrect for the same reason as Option D.

Exhibit 17-1 -According to Those Who Favor an Active Approach to Policy