Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

Question

Quizplus · Accepted Answer

To increase equilibrium aggregate output and move it closer to the level of potential output in a recessionary gap, the best option would be expansionary fiscal policy. Among the given options, decreasing taxes would be the most effective way to increase aggregate demand and encourage consumer spending. Decreasing government purchases or transfers could lead to a decrease in overall spending and negatively impact the economy. Increasing real interest rates would lead to a decrease in investment spending and further worsen the recessionary gap. Therefore, the best choice is to decrease taxes.

Suppose the Economy Is in a Recessionary Gap