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Question
Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?
A) Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B.
B) Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending.
C) Point C is a long -run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B.
D) Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B.
Answer
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