Exhibit 16-3
-According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-3 attain equilibrium at potential output?
A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the Fed or the government will act to decrease aggregate demand.
E)Aggregate demand should be increased.

Question

Exhibit 16-3 
-According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-3 attain equilibrium at potential output?
A)The SRAS curve will shift to the left. 
B)The SRAS curve will shift to the right. 
C)Either the money supply or government spending should be increased. 
D)Either the Fed or the government will act to decrease aggregate demand. 
E)Aggregate demand should be increased.

Quizplus · Accepted Answer

According to those who favor an active approach to policy, the economy shown in Exhibit 16-3 can attain equilibrium at potential output by decreasing aggregate demand. This can be achieved by either the Fed or the government acting to decrease demand through measures such as monetary or fiscal policy. Option D correctly expresses this approach. Option A is incorrect as increasing the money supply or government spending would increase aggregate demand and shift the SRAS curve to the left, leading to further inflation. Option B is also incorrect as increasing SRAS would not bring the economy to potential output. Option E is incorrect as increasing aggregate demand would further inflate the economy.

Exhibit 16-3 -According to Those Who Favor an Active Approach to Policy,how