If the economy is at an output level below the LRAS curve,which of the following fiscal policies would likely lead to a higher equilibrium level of real GDP in the short run?

Question

Quizplus · Accepted Answer

When the economy is operating below the LRAS curve, there is a recessionary gap and unemployment. To increase equilibrium level of real GDP in the short run, the government can increase government spending and/or reduce taxes. Government spending will increase aggregate demand (AD) and reduce unemployment, while reducing taxes will increase disposable income and consumer spending, thereby increasing AD. Decreasing government spending and/or increasing taxes will have a contractionary effect on the economy and further decrease AD, making the recessionary gap worse.

If the Economy Is at an Output Level Below the LRAS