Suppose that the economy is shown to the right This economy is currently experiencing O A. hyperinflation. LRAS O B. an inflationary gap. SRAS C. crowding out O D. a recessionary gap. Using the line drawing tool, draw and label the fiscal policy correction that will bring the economy to full employment. Properly label this line. Carefully follow the instructions above, and only draw the required objects. AD 8 1012 14 16 18 20 Real GDP (S trillions)
Answer
Answer
Option D
A recessionary gap
The given graph has short-run equilibrium (SRAS=AD) at the left of
the LRAS means the potential output is higher than the actual
output, so the economy is in a recessionary gap.
Expansionary fiscal policy is used to get it at full employment
level. It increases government spending or decreases taxes to
increase aggregate demand(AD). It shifts AD to the right and
increases price level and the actual output.
