31 Use the Fiscal Policy II Figure 206 Suppose that this ec

____ 31. Use the “Fiscal Policy II” Figure 20-6. Suppose that this economy is in equilibrium at E1. An appropriate fiscal policy would be to:

a. increase transfer payments to retired persons

b. increase interest rates

c. increase government spending on national defense

d. increase personal income taxes

e. increase subsidies for research and investment

Aggregate price level LRAS SRAS P1 P2 AD1 AD2 YE Y1Real GDP = potential output

Solution

At E1 there is too much demand and inflation. The economy is growing at greater than potential level. In order to curb it only tool among the alternatives is appropriate.i.e increase personal income taxes