Figure 16-2
-Refer to Figure 16-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to
A)lower the discount rate of interest.
B)execute an open market sale of government securities.
C)increase government transfer payments.
D)increase marginal income tax rates.

Question

Figure 16-2 
-Refer to Figure 16-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to
A)lower the discount rate of interest. 
B)execute an open market sale of government securities. 
C)increase government transfer payments. 
D)increase marginal income tax rates.

Quizplus · Accepted Answer

If the economy is at point A, it is in a recessionary gap where output is below potential GDP. Hence, an appropriate fiscal policy would be expansionary, which can be achieved by increasing government transfer payments (such as unemployment benefits) to boost consumer spending and aggregate demand. Lowering the discount rate of interest (A) is a monetary policy tool used by the Federal Reserve, not fiscal policy. Executing an open market sale of government securities (B) is also a monetary policy tool. Increasing marginal income tax rates (D) would decrease disposable income and reduce aggregate demand, which would be contractionary fiscal policy and not appropriate in a recessionary gap.

Figure 16-2 -Refer to Figure 16-2.In the Graph Above,if the Economy Is