Question:
In a hypothetical economy if real GDP is Rs. 10 000 billion, and full employment real GDP is Rs. 8 000 billion, which of the following combinations of policies might have brought the economy to this point?
(1) A decrease in taxes and an increase in policy rates
(2) A decrease in taxes and a decrease in interest rates
(3) A decrease in taxes and selling government securities in an open market operation
(4) An increase in government purchases and an increase in statutory reserve ratio
(5) A decrease in taxes and a decrease in government purchases
Correct Answer:
(2)
Answer Explanation:
The economy is operating above full employment (10,000 > 8,000), indicating an inflationary gap driven by high aggregate demand. This is typically caused by expansionary policies, such as decreasing taxes (fiscal) and decreasing interest rates (monetary).
Topic: Macroeconomic Policy Year: 2023
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