Use the figure below to answer the following question(s). Figure 11-2
Refer to Figure 11-2. If an economy operates in the short run at point a, Keynesian analysis indicates that restrictive fiscal policy will
A) increase AD and move the economy toward point c.
B) decrease AD and move the economy toward point b.
C) increase SRAS and move the economy toward point b.
D) decrease SRAS and move the economy toward point c.

Question

Use the figure below to answer the following question(s). Figure 11-2
 Refer to Figure 11-2. If an economy operates in the short run at point a, Keynesian analysis indicates that restrictive fiscal policy will
A) increase AD and move the economy toward point c. 
B) decrease AD and move the economy toward point b. 
C) increase SRAS and move the economy toward point b. 
D) decrease SRAS and move the economy toward point c.

Quizplus · Accepted Answer

At point a, the economy is in a recessionary gap with output below potential output (Y1 < Yp). Restrictive fiscal policy, such as a decrease in government spending or an increase in taxes, would decrease AD (aggregate demand) and shift the AD curve leftward. This would lead to a further decrease in output and a move toward point b.

Use the Figure Below to Answer the Following Question(s)