Exhibit: Fiscal Policy 1 At output level Y1. potential output is greater than actual cutput. the economy is operating at a point outside its production possibilities curve. the actual unemployment rate is less than the natural rate of unemployment. agregate demand will fall to restore equilibrium. Suppose the economy has a recessionary gap. If supply-side effects are very strong in relation to the demandside effects, the impact of tax cuts will be strengthened because the increase in disposable income induces consumption, which in turn encourages firms to expand production, thereby shitting the short-run aggregate supply curve to the right. the impact of tax cuts will be strengthened because in addition increasing aggregate dernand. long-run and short-run aggregate supply will also increase. the impact of increased transfer payments to help re-tool the unemployed with new skills will be strengthened, thereby shifting the aggregate demand curve further to the right. the impact of increased transfer payments to help re-tool the unemploved with new skills will be strengthened, thereby shifting the short-run aggregate supply curve to the right. Supply-side economics is the school of thought that advocates the use of monetary policy to stimulate long-run aggregate supply. fiscal policy to stimulate long-run agrregate demand. monetary policy to stimulate short-run aggregate demand. fiscal policy to stimulate long-run aggregate supply. Which of the following is an example of crowding out? A decrease in the rate of growth of the stock of money decreases GDP. A deficit causes an increase in interest rates, which causes a decrease in investment spending. An increase in tariffs causes a decrease in imports. A decrease in government housing subsidies causes an increase in private spending on housing