Refer to the diagram. If the full-employment level of GDP is A, then it would be appropriate ﬁscal policy for government to
A) decrease spending and increase taxes.
B) decrease spending and decrease taxes.
C) increase spending and increase taxes.
D) increase spending and decrease taxes.

Question

Refer to the diagram. If the full-employment level of GDP is A, then it would be appropriate ﬁscal policy for government to
A) decrease spending and increase taxes. 
B) decrease spending and decrease taxes. 
C) increase spending and increase taxes. 
D) increase spending and decrease taxes.

Quizplus · Accepted Answer

At the full-employment level of GDP, the economy is already producing at its maximum capacity, which means that any increase in government spending would result in inflationary pressures. Therefore, to maintain economic stability, the appropriate fiscal policy would be to decrease government spending and increase taxes to reduce aggregate demand and prevent inflation.

Refer to the Diagram