Chapter 4R, Problem 20MCQ

To determine

To determine what policy will equate the actual output with potential output.

Explanation of Solution

When there is a recessionary gap in the economy, expansionary fiscal policy is used to correct the economy which will shift the aggregate demand curve to the right. This will equate the actual output to the potential output.

When there is a recessionary gap in the economy, expansionary and not contractionary policies are used.

When there is a recessionary gap in the economy, expansionary and not indiscretionary policies are used.

When there is a recessionary gap in the economy, expansionary and not recessionary policies are used.

When there is a recessionary gap in the economy, expansionary and not inflationary policies are used.

Hence, option ‘a’ is the correct option.

Economics Concept Introduction

When the actual output is less than the potential output, there is a recessionary gap in the economy. To correct that, expansionary fiscal policy can be used which will shift the aggregate demand curve to the right. This will equate the actual output to the potential output.