Table 16-1

-Refer to Table 16-1.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should
A)decrease income taxes.
B)decrease government purchases.
C)decrease the money supply.
D)increase the level of interest rates.

Question

Table 16-1
 
-Refer to Table 16-1.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should
A)decrease income taxes. 
B)decrease government purchases. 
C)decrease the money supply. 
D)increase the level of interest rates.

Quizplus · Accepted Answer

If the Congress and the president want to keep real GDP at its potential level in 2014 without using fiscal policy, they should decrease income taxes. This would increase disposable income of households, leading to a higher level of consumption spending, which will increase aggregate demand and output. Decreasing government purchases or decreasing the money supply would reduce aggregate demand and output. Increasing the level of interest rates would also reduce aggregate demand as it would make borrowing more expensive for households and firms.

Table 16-1 -Refer to Table 16-1.Consider the Hypothetical Information in the Table