In a certain year the aggregate demand at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $200 billion.To obtain full employment under these conditions the government should:
A)encourage personal saving by increasing the interest rate on government bonds.
B)decrease government expenditures.
C)reduce tax rates and increase government spending.
D)discourage private investment by increasing corporate income taxes.

Question

Quizplus · Accepted Answer

In order to reach full-employment GDP, the government needs to increase overall spending in the economy. Option C would directly increase spending by reducing tax rates and increasing government spending. Option A, encouraging personal saving, would reduce spending in the short-term and could potentially worsen the situation. Option B, decreasing government expenditures, would also reduce overall spending and potentially harm the economy. Option D, discouraging private investment, would also reduce overall spending and potentially lead to a decrease in economic growth.

In a Certain Year the Aggregate Demand at the Existing