Use the following to answer questions: -(Figure: Short- and Long-Run Equilibrium) Refer to Figure: Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output is a(n): A) increase in transfer payments. B) decrease in transfer payments. C) increase in taxes. D) decrease in government spending.

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An increase in transfer payments is a fiscal policy tool that can stimulate demand by increasing consumers' income, helping to move the economy back to its potential output if it is below that level.

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