Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?
A) Shift aggregate demand by increasing taxes
B) Shift aggregate demand by decreasing transfer payments
C) Shift aggregate demand by decreasing government spending
D) Shift aggregate demand by increasing transfer payments

Question

Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?
A) Shift aggregate demand by increasing taxes 
B) Shift aggregate demand by decreasing transfer payments 
C) Shift aggregate demand by decreasing government spending 
D) Shift aggregate demand by increasing transfer payments

Quizplus · Accepted Answer

Increasing transfer payments will increase disposable income and shift aggregate demand to the right, increasing real GDP. Options A and B will decrease disposable income and aggregate demand, lowering real GDP. Option C will decrease government spending and potentially lead to a decrease in jobs and income, lowering real GDP further.

Refer to the Figure Above