The graph shows an economy that is above full employment. To restore full employment, the government...

 

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The graph shows an economy that is above full employment. To restore full employment, the government decreases government expenditure by $0.5 trillion. Draw a curve to show the effect of the decrease if this is the only change in spending plans. Label the curve AD₂-AE The decrease in government expenditure sets off a multiplier process. Draw a curve that shows the multipler effect that returns the economy to full employment. Label It AD₁- Draw a point at the full-employment equilibrium Choose the correct statement. OA. An increase in taxes will decrease aggregate demand, but because the tax multiplier is smaller than the goverment expenditure multiplier, the economy will not return to potential GDP OB. Eliminating an inflationary gap is very simple-calculate the size of the gap, the size of the multiplier and then change government expenditure for an immediate decrease in real GDP back to potential GDP OC. Contractionary fiscal policy can eliminate inflationary pressure. OD. An equal decrease in government expenditure and taxes cannot return the economy to full employment. 145 135 125- 115 106- Price level (GDP price index, 2009-100) Potential GOP 120 95+ 11 13 AS AD 12 Real GDP (tions of 2009 dollars) 14 The graph shows an economy that is above full employment. To restore full employment, the government decreases government expenditure by $0.5 trillion. Draw a curve to show the effect of the decrease if this is the only change in spending plans. Label the curve AD₂-AE The decrease in government expenditure sets off a multiplier process. Draw a curve that shows the multipler effect that returns the economy to full employment. Label It AD₁- Draw a point at the full-employment equilibrium Choose the correct statement. OA. An increase in taxes will decrease aggregate demand, but because the tax multiplier is smaller than the goverment expenditure multiplier, the economy will not return to potential GDP OB. Eliminating an inflationary gap is very simple-calculate the size of the gap, the size of the multiplier and then change government expenditure for an immediate decrease in real GDP back to potential GDP OC. Contractionary fiscal policy can eliminate inflationary pressure. OD. An equal decrease in government expenditure and taxes cannot return the economy to full employment. 145 135 125- 115 106- Price level (GDP price index, 2009-100) Potential GOP 120 95+ 11 13 AS AD 12 Real GDP (tions of 2009 dollars) 14

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The detailed answer for the above question is provided below The correct statement is C Contractionary fiscal policy can eliminate inflationary pressu... View the full answer