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Exhibit: Aggregate Demand and Aggregate Supply at Different Price Levels

-(Exhibit: Aggregate Demand and Aggregate Supply at Different Price Levels) The table shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. If policymakers choose to close the gap by using stabilization policy, they should use
A) contractionary fiscal or monetary policies.
B) expansionary fiscal or monetary policies.
C) a combination of contractionary fiscal and expansionary monetary policies.
D) a combination of expansionary fiscal and contractionary monetary policies.

Question

Use the following to answer questions .
Exhibit: Aggregate Demand and Aggregate Supply at Different Price Levels
 
-(Exhibit: Aggregate Demand and Aggregate Supply at Different Price Levels) The table shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. If policymakers choose to close the gap by using stabilization policy, they should use
A) contractionary fiscal or monetary policies. 
B) expansionary fiscal or monetary policies. 
C) a combination of contractionary fiscal and expansionary monetary policies. 
D) a combination of expansionary fiscal and contractionary monetary policies.

Quizplus · Accepted Answer

The table shows that the equilibrium output level is $6.4 trillion, which is less than the potential level of output ($7.6 trillion). This indicates that there is a recessionary gap in the economy. To close this gap, policymakers should use expansionary fiscal or monetary policies, which will increase aggregate demand and shift the aggregate demand curve to the right. This will lead to an increase in output and employment, and eventually close the recessionary gap. Therefore, the best choice is option B.

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