Asked by Yoselin Ramirez on May 05, 2024
Verified
To close a recessionary gap we should
A) raise G and raise taxes.
B) lower G and lower taxes.
C) raise G and lower taxes.
D) lower G and raise taxes.
Recessionary Gap
A situation in an economy where the actual output is less than the potential output, indicating underutilized resources and unemployment.
Raise G
This term is ambiguous without context, but it could refer to increasing government spending or investment in certain contexts.
- Ascertain the influence and purpose of government expenditures and taxation concerning fiscal policy.
- Assess the effect of government spending and taxation policies on achieving full employment and stabilizing GDP at its equilibrium level.
Verified Answer
BS
Betty SheerohMay 06, 2024
Final Answer :
C
Explanation :
To close a recessionary gap, we need to increase aggregate demand, which can be achieved by increasing government spending (G) and lowering taxes. Increasing government spending will directly increase aggregate demand, while lowering taxes will provide households with more disposable income, which they can spend and thereby increase aggregate demand. Decreasing taxes and decreasing government spending (option B) will decrease aggregate demand, which is contrary to the objective. Option A (increasing both G and taxes) and D (decreasing both G and taxes) will have an offsetting effect on aggregate demand and may not effectively close the recessionary gap. Therefore, option C is the best choice.
Learning Objectives
- Ascertain the influence and purpose of government expenditures and taxation concerning fiscal policy.
- Assess the effect of government spending and taxation policies on achieving full employment and stabilizing GDP at its equilibrium level.