Question

Item 8 5 points Item 8 A graph plots price level versus real G D P. A curve labeled A S and 3 parallel curves labeled A D 1, A D 2, and A D 3 are graphed. The horizontal axis is labeled real G D P. Point Q subscript f is marked on the horizontal axis. The vertical axis is labeled price level. A curve labeled A S begins at the bottom left, goes up and to the right with increasing steepness, and ends at the top-right. 3 parallel curves labeled A D 1, A D 2, and A D 3 in order from bottom to top crosses A S at 3 different points. Each curve begins at the top-left, crosses A S at a point, and ends at the bottom right. A D 2 intersects A S at a point corresponding to Q subscript f. Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to Multiple Choice do nothing since the economy appears to be achieving full-employment real output. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

Answer 1

To stabilize the economy at full-employment output, the recommended fiscal policy involves increasing taxes and reducing government spending to shift the aggregate demand curve leftward from AD3 to AD2, correcting the excessive demand and controlling inflation.

Step-by-step explanation:

In the given scenario, the student asks about the appropriate fiscal policy when the aggregate demand curve (AD3) describes the current situation. To bring the economy to full-employment real output, the correct choice would be to increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD2, assuming downward price flexibility.

Based on the information provided about the aggregate demand (AD) and aggregate supply (AS) curves, if AD3 reflects the current economic situation and intersects the AS curve at a point where the output is beyond Qf, the full-employment output, appropriate fiscal policy would entail measures to decrease aggregate demand. As a fiscal response, the recommendation would be to increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD2.

This shift is expected to lower the aggregate demand, bringing the economy back towards the full-employment equilibrium, alleviating upward pressure on the price level, and ensuring a stable economy without generating excessive inflation.