Table 27-1

-Refer to Table 27-1. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2014, they should
A) decrease income taxes.
B) decrease government purchases.
C) decrease the money supply.
D) increase the level of interest rates.

Question

Table 27-1
 
-Refer to Table 27-1. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2014, they should
A) decrease income taxes. 
B) decrease government purchases. 
C) decrease the money supply. 
D) increase the level of interest rates.

Quizplus · Accepted Answer

In order to keep real GDP at its potential level, the Congress and the president should stimulate aggregate demand. One way to do this is by decreasing income taxes, which would increase disposable income and lead to an increase in consumption and aggregate demand. Decreasing government purchases or the money supply, as well as increasing interest rates, would likely decrease aggregate demand and lead to a decrease in real GDP.

Table 27-1 -Refer to Table 27-1. Consider the Hypothetical Information in the Hypothetical