You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90
Billion, and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600
Billion, then what combination of actions would be most consistent with closing the GDP gap here?
A) increase government spending and taxes
B) decrease government spending and taxes
C) decrease government spending and increase taxes
D) increase government spending and decrease taxes

Question

Quizplus · Accepted Answer

The GDP gap is calculated as the difference between the current level of aggregate demand and the full-employment level of GDP. In this case, the GDP gap can be calculated as follows:

GDP gap = $600 billion - ($400 billion + $40 billion + $90 billion + $25 billion) 
GDP gap = $45 billion

To close this GDP gap, the government should increase its spending or reduce taxes, as both actions would increase aggregate demand. Therefore, options A and C can be ruled out.

Option B suggests a decrease in government spending and taxes, which would decrease aggregate demand and widen the GDP gap. This option is not consistent with closing the gap.

Option D suggests an increase in government spending and a decrease in taxes, which would increase aggregate demand and close the GDP gap. This option is the best choice.

You Are Given the Following Information About Aggregate Demand at the Existing