When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates
A)a decrease in aggregate demand.
B)an increase in aggregate supply.
C)a decrease in employment.
D)a decrease in saving.

Question

Quizplus · Accepted Answer

Supply-side policies aim to increase the economy's capacity to produce goods and services. Hence, they lead to an increase in aggregate supply. With an increase in the productive capacity of the economy, equilibrium real GDP can increase, without causing inflation as long as aggregate demand grows at the same rate as aggregate supply. Therefore, the reason for the increase in equilibrium real GDP is an increase in aggregate supply. Choices A, C, and D are not accurate as they do not align with the objective of supply-side policies or the impact they have on the economy.

When Supply-Side Policy Is Successful in Pushing Up Equilibrium Real