49. (Problem 2b) The accompanying diagram shows the current macroeconomic situat

Question

49. (Problem 2b) The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1 and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP.

Which type of fiscal policy—expansionary or contractionary—would move the economy of Brittania to potential output, YP? A. Neither contractionary nor expansionary fiscal policy will move Brittania to YP. B. contractionary fiscal policy C. expansionary fiscal policy Aggregate price level LRAS SRAS P. AD1 Potential YP Y output Real GDP

Explanation / Answer

(B) because potential output is less than real . It means there is excess money supply in the economy and this money should be withdraw by means of contraction fiscal policy . A decrease in government expenditure would decrease GDP directly because it is a part of GDP

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