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) increase consumption expenditures and cause real GDP to increase relative to potential GDP.
B) increase the nominal interest rate and cause potential GDP to increase relative to real GDP.
C) decrease the real interest rate and decrease expectations of inflation.
D) increase the target interest rate and cause real GDP to fall relative to potential GDP.

Question

Quizplus · Accepted Answer

Cutting personal income tax rates would increase disposable income for consumers, leading to an increase in consumption expenditures. This increase in aggregate demand would cause an increase in real GDP relative to potential GDP.

Assume the Economy Is in a Recession and the Federal