Question

The graph shows an economy below full employment. To restore full employment, the government increases government expenditure by $0.5 trillion. Draw a curve to show the effect of the increase if it is the only change in spending plans. Label the curve ADo AE Price level (GDP price index, 2009-100) Potential GDP The increase in government expenditure sets off a multiplier process. Draw a curve that shows the multiplier effect that returns the economy to full employment. Label it AD, Draw a point at the full-employment equilibrium Choose the correct statement. AS 110 O A. An equal increase in government expenditure and taxes cannot move the economy back to full employment. O B. If real GDP is below potential GDP, the govenment can use either discretionary or automatic fiscal policy in an attempt to restore full employment. ADo O C. A decrease in taxes will increase aggregate demand, but because the tax multiplier is smaller than the government expenditure multiplier, the economy will not return to potential GDP 10.5 Real GDP (trillions of 2009 dollars) 9.5 11.5 13.5 O D. If real GDP is below potential GDP, discretionary fiscal policy can be used in an attempt to restore full employment >> Draw only the objects specified in the questio

Answer 1

Ans

P is such point

Both curves are towards right side of ADo but AD1 meet As on its intersection with potential gdp level

D is right. Economists recommend discretionary monetary and fiscal policy for that