If real GDP is less than potential GDP, which of the following fiscal policies would increase real GDP?
A) only a decrease government expenditure
B) increase government expenditure and/or decrease taxes
C) only an increase taxes
D) decrease government expenditure and/or increase taxes

Question

Quizplus · Accepted Answer

If real GDP is less than potential GDP, it means that the economy is operating below its full capacity and there is a recessionary gap. To increase real GDP, fiscal policy needs to stimulate aggregate demand. Option B suggests increasing government expenditure or decreasing taxes, which will increase disposable income and stimulate consumer spending. Higher government spending will also increase aggregate demand by increasing government purchases of goods and services. Therefore, option B would be the best choice to increase real GDP.

If Real GDP Is Less Than Potential GDP, Which of the Following