Consider the following graph. Suppose the economy is currently at a point like A. Assume the central bank in this economy remains idle. What type of policy can the Government conduct to reach point B?

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The question presents a macroeconomic graph where the economy is at a point like A and the central bank is idle. We must determine what government policy can move the economy to point B.

Option 1: Expansionary fiscal policy
- Explanation: Expansionary fiscal policy (increasing government spending or reducing taxes) shifts the aggregate demand curve to the right, typically raising output and prices in the short run. However, in this scenario the move from A to B appears to involve a move along a path that would reduce output or lower the price level toward the SRAS/AD intersection shown, suggesting a decrease in demand rather than an increase. Therefore this choice would not typically move the economy toward B from A if B represents a lower level of real GDP or price level.

Option 2: Contractionary fiscal policy
- Explanation: Contractionary fiscal policy (reducing government spending or increasing taxes) shifts the aggregate demand curve to the left, reducing overall demand, output, and price level in the short run. If the economy starts at A and the goal is to reach B (often a lower output/price point on a typical AD-AS diagram with LRAS vertical), this policy aligns with pulling the equilibrium from a higher demand level toward a lower one, which corresponds to moving toward B.

Option 3: Procyclical fiscal policy
- Explanation: Procyclical policy amplifies economic fluctuations by moving in the same direction as the cycle, i.e., expanding during booms and contracting during recessions. In many standard diagrams, procyclical fiscal policy would push the economy away from stabilization goals and away from a specific target like B if B is a lower-demand equilibrium. This makes it inconsistent with a deliberate move to point B in a typical stabilization context.

Option 4: Expansionary monetary policy
- Explanation: This option involves changes in monetary policy, not fiscal policy. Since the central bank is assumed to remain idle (no monetary action), expansionary monetary policy is not available as the government’s action here. The question asks specifically for a policy the Government can conduct, and given the idle central bank, monetary policy cannot be used to reach B.

In summary, among the given options, contractionary fiscal policy best describes a governmental action that would reduce aggregate demand and move the economy from point A toward point B on the depicted AD-AS framework when the central bank remains inactive. The other choices either imply the opposite movement, rely on policy instruments not available in this setup, or describe actions that would not produce the stated shift.

ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

Consider the following graph. Suppose the economy is currently at a point like A. Assume the central bank in this economy remains idle. What type of policy can the Government conduct to reach point B?

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Similar Questions

Fiscal policy refers to the idea that changes in:

are changes in federal taxes and government purchases that are intended to achieve macroeconomic policy goals, and are changes in federal taxes and government spending that respond to the Business Cycle without direct government action.

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ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

Consider the following graph. Suppose the economy is currently at a point like A. Assume the central bank in this economy remains idle. What type of policy can the Government conduct to reach point B?

View Explanation

Log in for full answers

Similar Questions

Fiscal policy refers to the idea that changes in:

______________ are changes in federal taxes and government purchases that are intended to achieve macroeconomic policy goals, and ______________ are changes in federal taxes and government spending that respond to the Business Cycle without direct government action.

Which of the following has been cited by economists as a drawback of fiscal policy in comparison to monetary policy?

Which of the following government fiscal policy actions would increase the public debt?

Country D faces rising unemployment after a banking crisis that undermined business confidence, while at the same time the Stability and Growth Pact holds. Which of the following best captures this country's policy circumstances?

The pandemic-induced economic crisis led to which unprecedented fiscal development?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

are changes in federal taxes and government purchases that are intended to achieve macroeconomic policy goals, and are changes in federal taxes and government spending that respond to the Business Cycle without direct government action.