Final answer:
When Franklandia's economy is producing beyond potential GDP, sound fiscal policies should aim to create stability by slowing down the economy to prevent inflation. These policies adjust government spending and taxes to manage demand and align growth with potential GDP.
Step-by-step explanation:
When the economy of Franklandia is producing beyond potential GDP, it indicates that the economy is overheated, and this can lead to inflationary pressures. In such a situation, sound fiscal policies would aim to create stability by slowing down the economy to prevent inflation. By adjusting fiscal policies such as government spending and taxes, the government can manage aggregate demand and guide the economy towards a more sustainable growth path, closer to its potential GDP.
If the economy is above its potential GDP, further stimulation could cause unemployment to drop to unsustainably low levels, leading to a scarcity of workers and rapidly rising wages, which contributes to inflation. Therefore, the correct answer is that sound fiscal policies in this situation should create stability, not inflation, unemployment, or economic growth which is already exceeding potential levels.