Question

Imagine that Ireland only produces whiskey. Currently, Ireland’s aggregate output of whiskey is greater than their...

Imagine that Ireland only produces whiskey. Currently, Ireland’s aggregate output of whiskey is greater than their potential output. The central bank is in a period of transition, so it is up to the Irish government to implement a policy to push the economy back towards long-run equilibrium. Which of the following is a plausible action(s) that the government could take?

i.Increase transfer payments

ii. Decrease government purchases

iii.Raise the interest rate Increase taxes

iv.Decrease the money supply

  • A.

    i, ii, and iv only

  • B.

    ii and iv only

  • C.

    iii and v only

  • D.

    i only

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Answer #1

The aggregate output of risk is greater than their potential output. This is a condition of inflationary gap in Ireland. Government you will have to use a contractionary fiscal policy to push the economy back towards long-run equilibrium by decreasing the aggregate demand in Ireland. So, Government would have to Decrease the Government Purchases or the Government could increase the taxes. Government cannot influence the money supply and wouldn't Increase the Transfer payments.

Now, none of the given Options below have both the things which the Government could do. So, none of the options is correct.

Again, the Government would have to Decrease the Government Purchases or the Government could increase the taxes to push the Economy back towards the long-run equilibrium.

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