Figure 17.1
-If the economy moves from A to B in Figure 17.1,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

Figure 17.1 
-If the economy moves from A to B in Figure 17.1,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

The economy is operating below potential GDP at point A, so expansionary fiscal policy is needed to increase aggregate demand and shift the economy to potential GDP. This can be achieved by increasing government spending or decreasing taxes. Therefore, option B, increasing government spending, is the appropriate fiscal policy choice to achieve potential GDP.

Figure 17.1 -If the Economy Moves from a to B in Figure