In a certain year,an economy's potential output is $280 billion,while its equilibrium real output is expected to be $300 billion.Under these conditions,the government should:
A)increase tax rates and reduce government purchases
B)discourage personal saving by reducing the interest rate on government bonds
C)increase government purchases
D)encourage private investment by reducing corporate income taxes
E)increase amounts spent on government transfer payments

Question

Quizplus · Accepted Answer

When an economy's equilibrium real output exceeds its potential output, it indicates an overheating economy, which can lead to inflation. To cool down the economy and bring output back to its potential level, the government should reduce aggregate demand. Increasing tax rates and reducing government purchases are effective ways to achieve this.

In a Certain Year,an Economy's Potential Output Is $280 Billion,while