Which of the following actions could be undertaken if the government wants to reduce a recessionary gap?
A) Increase taxes and reduce government spending.
B) Reduce taxes and increase government spending.
C) Increase taxes and increase government spending.
D) Increase taxes more than the amount of reduction in government spending.

Question

Quizplus · Accepted Answer

When the economy is experiencing a recessionary gap (i.e. when actual output is below potential output), the government can use expansionary fiscal policy to increase aggregate demand and stimulate economic growth. One way to do this is by reducing taxes to increase disposable income and consumer spending, while also increasing government spending on public projects and programs to create jobs and increase overall demand in the economy. Option A would have the opposite effect, as it would decrease spending and aggregate demand, potentially worsening the recession. Option C could also be effective, but only if tax revenues are used to fund productive public investments that increase long-term economic growth. Option D would have a mixed effect, as it would decrease overall demand by more than the reduction in government spending, potentially exacerbating the recession.

Which of the Following Actions Could Be Undertaken If the Government