A reduction in taxes, combined with an increase in government purchases in an economy, would:
A)increase aggregate demand and close a recessionary gap in the economy.
B)decrease aggregate demand and create a recessionary gap in the economy
C)leave aggregate demand unchanged and create a recessionary gap in the economy.
D)have an indeterminate effect on aggregate demand and close a recessionary gap in the economy.
E)have an indeterminate effect on aggregate demand and create a recessionary gap in the economy

Question

Quizplus · Accepted Answer

A reduction in taxes will increase disposable income and consumer spending, leading to an increase in aggregate demand. An increase in government purchases will also increase aggregate demand. Therefore, both policies together will further increase aggregate demand, which will help to close a recessionary gap in the economy.

A Reduction in Taxes, Combined with an Increase in Government