Figure 11-4 According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?
A) increase both taxes and government transfer payments
B) reduction in government purchases and increase in taxes
C) increase in government purchases and reduction in taxes
D) increase in taxes to reduce the government deficit

Question

Figure 11-4  According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?
A) increase both taxes and government transfer payments 
B) reduction in government purchases and increase in taxes 
C) increase in government purchases and reduction in taxes 
D) increase in taxes to reduce the government deficit

Quizplus · Accepted Answer

According to Keynesian analysis, the economy illustrated in the figure is in a recessionary gap, which means it is producing below its potential output level. To move the economy to full employment, the government needs to increase aggregate demand. Option C, which suggests an increase in government purchases and a reduction in taxes, would boost aggregate demand through an increase in government spending and disposable income, leading to increased consumption and investment. Options A and D suggest an increase in taxes, which would decrease disposable income, leading to a decrease in consumption and investment, which would result in a further fall in output levels. Option B suggests a reduction in government purchases, which would decrease aggregate demand.

Figure 11-4 According to Keynesian Analysis, Which of the Following