If the government wants to close a GDP gap, it should

Question

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Lowering taxes will increase disposable income, leading to higher consumption and an increase in aggregate demand. This will help close the GDP gap. Option A, raising government spending, would increase aggregate demand, but it is not the best option as it could potentially lead to inflation. Option C, lowering government spending, would shift the aggregate supply curve to the left, causing a decrease in real GDP and potentially causing a recession. Option D, raising taxes, would reduce disposable income, leading to a decrease in consumption and a decrease in aggregate demand. Option E, raising both government spending and taxes by the same amount, would not result in any change since the aggregate supply and demand curves will shift to the right by the same amount, leaving the GDP gap unchanged.

If the Government Wants to Close a GDP Gap, It