QUESTION 4 Read pages 484-493 of the textbook before attempting this question LR

Question

QUESTION 4 Read pages 484-493 of the textbook before attempting this question LRAS SRAS " 130 120 110 100 90 AD 15 16 17189 20 Real GDP (trillions of 2009 dollars Assume that the economy is currently at Eo in a recession/in an expansion/at Based on the figure, the economy is full employment]. currently Without government intervention, the short run aggregate supply will move to the -[leftright] and the price level in the long run equilibrium will be130 / 120 / 110 / 100 /90]. If the government decides to help the economy to return to potential GDP, which type of policy should the government implement? policy]. Expansionary fiscal policy/contractionary fiscal This policy involves_[reducing taxes reducing interest rates /reducing After government intervention, the economy will reach a new long run equilibrium. The price level will equal and output will egual trlion.

Explanation / Answer

in an expansion phase, because output is greater than potential GDP.

left, 120 because SRAS will shift towards left .

contractionary fiscal policy ,this would shift AD to the lreft

reducing goverment spending

100, 16

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