Which of the following fiscal policies will help close an expansionary gap?
A) The government increases spending, which will increase aggregate demand.
B) The government increases spending, which will decrease aggregate demand.
C) The government decreases spending, which will increase aggregate demand.
D) The government decreases spending, which will decrease aggregate demand.

Question

Which of the following fiscal policies will help close an expansionary gap?  
A) The government increases spending, which will increase aggregate demand. 
B) The government increases spending, which will decrease aggregate demand. 
C) The government decreases spending, which will increase aggregate demand. 
D) The government decreases spending, which will decrease aggregate demand.

Quizplus · Accepted Answer

When there is an expansionary gap, it means that the economy is operating above its potential level, and there is excessive aggregate demand. To close this gap, the government needs to decrease aggregate demand, which can be achieved by decreasing spending (option D). If the government increases spending (options A and B), it will only exacerbate the expansionary gap by increasing the aggregate demand further. Option C is incorrect as decreasing government spending will decrease aggregate demand, which can lead to a recessionary gap, not help close an expansionary gap.

Which of the Following Fiscal Policies Will Help Close an Expansionary