Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

Question

Quizplus · Accepted Answer

Decreasing taxes would increase disposable income and aggregate demand, which would help close the recessionary gap by stimulating spending and production. A decrease in interest rates or an increase in the money supply could also help stimulate spending, but in the case of a recessionary gap, a more direct approach to increasing aggregate demand is needed. Option D may not be effective because a reduction in government spending could further decrease aggregate demand, exacerbating the recessionary gap.

Suppose the Economy Is Experiencing a Recessionary Gap at the Current