An active stabilization policy designed to limit the size of government would
A)raise G to eliminate a recessionary gap and lower taxes to eliminate an inflationary gap.
B)raise G to eliminate a recessionary gap and raise taxes to eliminate an inflationary gap.
C)reduce taxes to eliminate a recessionary gap and raise G to eliminate an inflationary gap.
D)reduce taxes to eliminate a recessionary gap and reduce G to eliminate an inflationary gap.

Question

Quizplus · Accepted Answer

An active stabilization policy designed to limit the size of government aims to reduce the overall size of government expenditure. To eliminate a recessionary gap, taxes should be reduced to increase disposable income and encourage consumption. To eliminate an inflationary gap, government expenditure should be reduced to decrease aggregate demand and control inflationary pressures. Therefore, reducing taxes to eliminate a recessionary gap and reduce G to eliminate an inflationary gap would be the appropriate policy to limit the size of government.

An Active Stabilization Policy Designed to Limit the Size of Government