emaining Time: 36 minutes, 22 seconds. Question Completion Status: 0 800 billion

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emaining Time: 36 minutes, 22 seconds. Question Completion Status: 0 800 billion dollars 600 billion dollars 200 billion dollars O o it has no effect on GDP QUESTION 19 Figure 12- Price LRAS SRAS AD, , Y Real GDP per year If discretionary fiscal policy is used to eliminate the gap, policy actions will O shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, Py and output O shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, Pt O shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P2 and output O shift the aggregate evel, Yp- and output level, Yp evel, Yp is restored at a price level corresponding to point- e demand curve and the short-run aggregate supply curve to the right until long-run equilibrium and output level. Yp QUESTION 20 9 poin Figure 12-3 Price level SRAS Sove and Submit to save and submit. Click Save All Answers to sove all answers

Explanation / Answer

In the above diagram, we can see that the real output Y1 is less than the potential output Yp. Thus, we have a situation of negative output gap. If we choose to use discretionaly fiscal policy to fill this gap then we need exapnasionary fiscal policy so that aggregate demand in the economy increases.

When an expansionary policy is used, the aggregate demand will increase and AD curve will shift to the right until the long run output is restored and price level is P2, when new AD curve intersects the short run supply curve and long run supply curve.

Option c is correct.

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