Exhibit 16-3
-According to those who favor an active approach to policy,where will the economy in Exhibit 16-3 end up once the expansionary gap is eliminated?
A)point A
B)point B
C)point C
D)either point B or C
E)cannot tell from the information given

Question

Exhibit 16-3 
-According to those who favor an active approach to policy,where will the economy in Exhibit 16-3 end up once the expansionary gap is eliminated?
A)point A 
B)point B 
C)point C 
D)either point B or C 
E)cannot tell from the information given

Quizplus · Accepted Answer

The active approach to policy is characterized by the use of fiscal policy tools (i.e. government spending and taxation) to manage the economy. In order to eliminate the expansionary gap (the amount by which output exceeds potential output), this approach would require the government to decrease spending or increase taxes. This would shift the aggregate demand curve to the left, leading to a decrease in output and a decrease in the price level. This adjustment is most likely to result in the economy returning to its potential level of output, represented by point C in the exhibit. Points A and B represent levels of output that are below potential, and so would not be considered desirable outcomes by proponents of an active approach to policy.

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