The graph shows AD₁ above AD at full employment. To close the gap with fiscal policy, aggregate demand must be brought down from A dashed 45° line, an AD line that meets it at F at the full-employment income of ₹400 crore, and a higher line AD₁. At ₹400 crore of income, AD₁ is ₹460 crore (point G), ₹60 crore above F.

The graph shows AD₁ above AD at full…

The graph shows AD₁ above AD at full employment.

Question 17

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The graph shows AD₁ above AD at full employment. To close the gap with fiscal policy, aggregate demand must be brought down from

A dashed 45° line, an AD line that meets it at F at the full-employment income of ₹400 crore, and a higher line AD₁. At ₹400 crore of income, AD₁ is ₹460 crore (point G), ₹60 crore above F.

AD₁ to AD, by ₹60 crore, through spending cuts or higher taxesCorrect answerYour answerAD to AD₁, by raising spendingCorrect answerYour answerAD₁ to AD, by ₹120 croreCorrect answerYour answerAD₁ to the horizontal axisCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer A

Correct answer: A

Cutting G or raising taxes by the size of the gap, ₹60 crore, shifts AD₁ down until it passes through F.

Concept: Closing the inflationary gap
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsExcess demand and the inflationary gap

Practise this chapter →

Ten questions from Excess & Deficient Demand, at your own pace.

Practise this chapter →

Ten questions from Excess & Deficient Demand, at your own pace.

The graph shows AD₁ above AD at full employment.

Question 17

Explanation