In Figure 9.8,if full-employment income is produced at $400 billion,the government can reduce a recessionary gap by
A)Decreasing government spending.
B)Decreasing investment spending.
C)Decreasing income taxes on consumers.
D)Increasing taxes.

Question

In Figure 9.8,if full-employment income is produced at $400 billion,the government can reduce a recessionary gap by
A)Decreasing government spending. 
B)Decreasing investment spending. 
C)Decreasing income taxes on consumers. 
D)Increasing taxes.

Quizplus · Accepted Answer

To reduce a recessionary gap, the government needs to increase aggregate demand. One way to do this is by decreasing income taxes on consumers, which will leave them with more disposable income to spend, thereby increasing aggregate demand. Decreasing government spending or investment spending would decrease aggregate demand and potentially worsen the recessionary gap. Increasing taxes would also decrease disposable income and ultimately decrease aggregate demand.