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Figure: Fiscal Policy Choices
-(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Question

Use the following to answer questions :
Figure: Fiscal Policy Choices

-(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Quizplus · Accepted Answer

When real GDP is below potential (Y1), the government may use expansionary fiscal policy, which involves increasing government spending and cutting taxes to stimulate economic activity.

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