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Figure: Short-Run Equilibrium
-(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, the appropriate policy to return the economy to potential output would be a(n) :

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Use the following to answer questions:
Figure: Short-Run Equilibrium

-(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, the appropriate policy to return the economy to potential output would be a(n) :

Quizplus · Accepted Answer

The economy is currently producing below its potential output, indicated by the output gap between Y1 and YP. To return the economy to potential output, it is necessary to decrease aggregate demand. One way to achieve this is by increasing taxes, which reduces disposable income and consumption, and thus helps to bring aggregate demand closer to its equilibrium level. Alternatively, a decrease in government spending could also achieve the same result. Options A and B would increase aggregate demand, and therefore worsen the output gap. A decrease in taxes (option D) would also increase aggregate demand and worsen the output gap.

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