If real GDP is less than potential GDP,which of the following fiscal policies would increase real GDP?
A) only a decrease government expenditure
B) only an increase taxes
C) increase government expenditure and/or decrease taxes
D) decrease government expenditure and/or increase taxes

Question

Quizplus · Accepted Answer

If real GDP is less than potential GDP, it indicates a recessionary gap which can be closed by increasing aggregate demand. This can be done by increasing government expenditure and/or decreasing taxes, which would increase disposable income and aggregate demand, leading to an increase in real GDP. Decreasing government expenditure and/or increasing taxes would have the opposite effect and would worsen the recessionary gap, making option D an incorrect choice. Option A is incorrect because decreasing government expenditure alone may have a contractionary effect on the economy, worsening the recession, rather than improving it. Similarly, option B of increasing taxes alone may reduce disposable income and aggregate demand, leading to a contraction rather than expansion of the economy.

If Real GDP Is Less Than Potential GDP,which of the Following