Suppose the economy experiences a recessionary gap. Policymakers who believe that the
Private sector has failed to provide adequately, a host of services that would benefit society would favor which of the following policies to close the gap?

Question

Quizplus · Accepted Answer

Policymakers who believe that the private sector has failed to provide adequately may favor an increase in government purchases to stimulate the economy and close the recessionary gap. This would increase aggregate demand, which would in turn lead to an increase in production and employment. Subsidies to private firms may not necessarily lead to an increase in production if demand is weak, and decreases in income tax rates may not increase spending if people choose to save the extra money. Decreases in interest rates may also not lead to an increase in spending if businesses and consumers are reluctant to borrow.

Suppose the Economy Experiences a Recessionary Gap