To eliminate a recessionary gap, policy-makers may pursue

Question

Quizplus · Accepted Answer

To eliminate a recessionary gap, the policy-makers need to increase the aggregate demand. An expansionary policy would do just that by increasing government spending, reducing taxes, and/or decreasing interest rates. A contractionary policy (choice B) would be counter-intuitive, as it would further reduce the aggregate demand and worsen the recessionary gap. A non-intervention policy (choice C) would not be effective, as it only increases aggregate demand but leaves the aggregate supply unaffected. Finally, decreasing the aggregate supply (choice D) would worsen the recessionary gap as it would only reduce the output and increase the price level, leading to stagflation.

To Eliminate a Recessionary Gap, Policy-Makers May Pursue