Expansionary fiscal policy maximizes non-inflationary employment gains from the deepest recessionary gap

Steps:

• A budget deficit represents expansionary fiscal policy, shifting aggregate demand (AD) rightward.
• Long-run aggregate supply (LRAS) is vertical at potential output (Y*); employment increases only up to Y* without inflation.
• Starting from output well below Y* allows the largest AD shift to close the recessionary gap, boosting employment fully.
• Beyond Y*, further AD shifts cause inflation without real employment gains.

Why A is correct:

• A marks the point farthest below LRAS (deepest recession), enabling the biggest output/employment rise to Y* per Okun's law, with no inflationary pressure.

Why the others are wrong:

• B: Closer to Y*, so smaller employment gain before hitting full capacity.
• C: At Y*, deficit causes immediate inflation with no employment increase.
• D: Above Y*, deficit worsens inflationary gap without employment benefits.

Final answer: A