Suppose the U.S. economy experiences a recessionary gap. Which of the following would be the most appropriate policy measure to close the recessionary gap?

Question

Quizplus · Accepted Answer

When an economy experiences a recessionary gap, it means that there is a high level of unemployment and low levels of economic activity. In order to close this gap, the government should use expansionary policy measures. Increasing government purchases, decreasing taxes, and/or increasing transfer payments will increase aggregate demand, leading to an increase in economic activity and a decrease in unemployment. Eliminating a budget deficit through a decrease in government expenditures or increasing taxes without corresponding increases in government purchases will have a contractionary effect on the economy, which will worsen the recessionary gap. Ensuring a budget surplus by increasing taxes will also have a contractionary effect on the economy, which will exacerbate the recessionary gap.