54 please? 54. Figure: Fiscal Policy Options LRAS Price level SRAS AD\" AD Real

Question

54 please?

54. Figure: Fiscal Policy Options LRAS Price level SRAS AD" AD Real GDP (Figure: Fiscal Policy Options) If the aggregate demand curve is AD 0 the economy is in long run equlibiunm. O an expansionary fiscal policy may be warranted. 0 the economy is experiencing a recessionary gap. O a contractionary fiscal policy may be warranted ss. Suppose an economy is producing real GDp of s300 billion. The potential output is equai to 5400 billion, and the MPC is equial to 0.80. Then the government should follow a policy of: O cutting taxes by $33.33 billion to bring the economy to potential output O raising taxes by $25 billion to bring the economy to potential output. O raising taxes by $33.33 billion to bring the economy to potential output O cutting taxes by $25 billion to bring the economy to potential output e government increases its spending by $200 billion. This new increase in spanding is financed by a fresh increase in taxes equal to s200 billion. this, GDP wil 0 increase by $200 bilion. 0 not change at all. O decrease by $200 billion. increase by $2,000 bililion. As a result Remaining:1:40:00 Start: 6:46 PM -,

Explanation / Answer

54) The correct answer to this question is "C". "The economy is experiencing a recessionary gap"

The first option is wrong the AD* demand curve doesn't represent long-run equilibrium its the point when long-run supply curve, short-run supply curve, and short-run demand curve meet at one point. The second option can be right an expansionary fiscal policy may be warranted but it is not only an expansionary fiscal policy but an expansionary monetary policy will also work in the situation. The fourth option is just the opposite in case of a recessionary gap we need an expansionary policy.

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