Use the following to answer questions:
-(Figure: Fiscal Policy Choices) Refer to Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Question

Use the following to answer questions:

-(Figure: Fiscal Policy Choices) Refer to Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Quizplus · Accepted Answer

In panel (a), the economy is below its potential output (indicating a recessionary gap), so to stimulate the economy, the government is likely to increase spending and cut taxes to boost aggregate demand.

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