In Figure 9.8,if full-employment income is produced at $400 billion,the government can reduce a recessionary gap by
A)Decreasing government spending.
B)Decreasing investment spending.
C)Decreasing income taxes on consumers.
D)Increasing taxes.

Question

In Figure 9.8,if full-employment income is produced at $400 billion,the government can reduce a recessionary gap by 
A)Decreasing government spending. 
B)Decreasing investment spending. 
C)Decreasing income taxes on consumers. 
D)Increasing taxes.

Quizplus · Accepted Answer

Decreasing income taxes will increase consumers' disposable income, which will increase their spending on goods and services, ultimately bringing the economy back to full-employment equilibrium. Decreasing government spending or investment spending may further decrease aggregate demand and worsen the recessionary gap. Increasing taxes may also decrease consumers' disposable income and worsen the recessionary gap.