The nation of Hyperbole is in a recession,and the government decides to increase taxes and reduce government spending to reduce the growing deficit.This will ________ aggregate demand and will likely ________ real GDP and employment.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question

Quizplus · Accepted Answer

When the government increases taxes and reduces government spending, it reduces the disposable income of consumers and households. As a result, consumers and households have less money to spend, which reduces the overall level of consumption and investment in the economy. This, in turn, leads to a decrease in aggregate demand.
When there is a decrease in aggregate demand, producers and firms will reduce their output, which leads to a decrease in real GDP and employment. Therefore, the correct answer is option C, which states that a decrease in aggregate demand will likely lead to a decrease in real GDP and employment.

The Nation of Hyperbole Is in a Recession,and the Government