Assume the economy is in a recession and the federal government decides to cut personal income tax rates.All else equal,the cut in tax rates should
A) shift the IS curve to the right and move the output gap closer to zero.
B) shift the IS curve to the left and move the output gap farther away from zero.
C) shift up the MP curve and move the output gap closer to zero.
D) shift up the MP curve and move the output gap farther away from zero.

Question

Quizplus · Accepted Answer

Cutting personal income tax rates would increase disposable income for households, which would increase consumption spending, leading to higher aggregate demand. This shift in aggregate demand would cause the IS curve to shift to the right, leading to higher output and incomes. Therefore, the output gap would move closer to zero, indicating a reduction in the severity of the recession.

Assume the Economy Is in a Recession and the Federal