How would you graphically illustrate counter-cyclical fiscal policy used to eliminate an inflationary gap?
A)A shift in the AS curve only.
B)A shift in the AS and the potential GDP curves.
C)A leftward shift in the AD curve.
D)A rightward shift in the AD curve.

Question

Quizplus · Accepted Answer

In order to eliminate an inflationary gap, counter-cyclical fiscal policy would involve decreasing aggregate demand. This can be represented graphically as a leftward shift in the AD curve, as a decrease in government spending or an increase in taxes would decrease overall spending in the economy. This would bring the economy back to equilibrium at potential GDP, thereby eliminating the inflationary gap. A shift in the AS curve or potential GDP curve would not be effective in addressing the issue of excess demand causing inflation.

How Would You Graphically Illustrate Counter-Cyclical Fiscal Policy Used to Eliminate