Use the following to answer questions:
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is AD':
A) a contractionary fiscal policy may be warranted.
B) an expansionary fiscal policy may be warranted.
C) the economy is in long-run equilibrium.
D) the economy is experiencing an inflationary gap.

Question

Use the following to answer questions: 
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is AD':
A) a contractionary fiscal policy may be warranted. 
B) an expansionary fiscal policy may be warranted. 
C) the economy is in long-run equilibrium. 
D) the economy is experiencing an inflationary gap.

Quizplus · Accepted Answer

If the aggregate demand curve is AD', it suggests that the economy is below its potential output, indicating a recessionary gap. Therefore, an expansionary fiscal policy may be warranted to increase aggregate demand and move the economy towards full employment.

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