LRAS SRAS AD 12 Rcal GDP Yoar in trillions 14 Refer to the above figure. Suppose

Question

LRAS SRAS AD 12 Rcal GDP Yoar in trillions 14 Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of.which can be closed by A) S2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending B) S2 trillion; an increase in government spending of $14 trillion C) $3 trillion; increasing government spending by $1 trillion D) S1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point c

Explanation / Answer

From point A, we can conclude that the real GDP is 12 trillion and the economy has to reach its potential level of 14 trillion. This means the recessionary gap is 2 trillion dollars. Only an expansionary fiscal policy in which government is pending is increased by 2 trillion would be able to shift the aggregate demand to a point B.

Option A is correct.

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