Refer to the information provided in Figure 12.8 below to answer the questions that follow. Figure 12.8
-Refer to Figure 12.8.For this economy to produce Y1 and sustain it without inflation
A)the price of oil must increase.
B)the government must increase spending.
C)the government must decrease spending.
D)potential output must increase.

Question

Refer to the information provided in Figure 12.8 below to answer the questions that follow.  Figure 12.8
-Refer to Figure 12.8.For this economy to produce Y1 and sustain it without inflation
A)the price of oil must increase. 
B)the government must increase spending. 
C)the government must decrease spending. 
D)potential output must increase.

Quizplus · Accepted Answer

In order for the economy to produce and sustain Y1 without inflation, potential output must increase. This means that the economy must increase its capacity to produce goods and services through investments in technology or human capital, for example. Increasing government spending or the price of oil may temporarily boost the economy but could also lead to inflation if the increased spending or prices are not sustainable in the long run. Decreasing government spending may have the opposite effect of reducing output and economic growth. Therefore, the best choice is to focus on increasing potential output.

Refer to the Information Provided in Figure 12