Which of the following may be an appropriate policy if real equilibrium GDP falls below the long-run aggregate supply curve?
A) An increase in government purchases.
B) Contractionary fiscal policy to increase the budget surplus.
C) An increase in individual income taxes to balance the budget.
D) An increase in business income taxes to increase tax fairness.

Question

Quizplus · Accepted Answer

If real equilibrium GDP falls below the long-run aggregate supply curve, it indicates a shortfall in demand in the economy. To stimulate demand and push the output back towards potential GDP, expansionary fiscal policy, such as an increase in government purchases, is appropriate. It would increase aggregate demand, leading to an increase in output, income, and employment. On the other hand, options B, C, and D would involve contractionary fiscal policy that reduces demand, making the situation worse.

Which of the Following May Be an Appropriate Policy If