Suppose the economy experiences a recessionary gap. Policymakers who believe that the Jprivate 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

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Policymakers who believe that the private sector has failed to provide adequately, a host of services that would benefit society would favor increasing government purchases to close the recessionary gap. This is because an increase in government purchases directly increases the aggregate demand, filling the output gap and putting the economy on track towards full employment. Subsidies to private firms, decreases in income tax rates, and decreases in interest rates are all demand-side policies that can help close recessionary gaps, but none of these policies specifically address the issue of the private sector's failure to provide adequate services.

Suppose the Economy Experiences a Recessionary Gap