Final answer:
To counteract a sharp drop in net exports, the government might increase its spending or reduce taxes, both of which can stimulate aggregate demand and help return the economy to its potential GDP.
Step-by-step explanation:
To offset the effect of a steep fall in net exports on the economy, the government might increase government purchases. By doing so, the government can stimulate aggregate demand (AD), which is essential during times of economic downturn, such as a recession. This policy action aligns with Keynesian economic principles, which suggest that during extreme economic conditions, government intervention is critical to adjust aggregate demand and help steer the economy back to a potential GDP.
An alternative measure the government can employ is to reduce taxes, which encourages consumption and investment spending by increasing disposable income for consumers and businesses. Both increasing government purchases and decreasing taxes are means to shift the aggregate expenditure function upwards, leading to a new equilibrium at a higher level of GDP, as seen in economic models like Figure D9 (a) and Figure B9 (a).