A recessionary gap can be closed with:
A) contractionary monetary policy.
B) an increase in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the actual level of output in an economy is below the potential level of output. To close the gap, expansionary fiscal policy is the best choice. This involves increasing government spending or decreasing taxes in order to stimulate aggregate demand and thereby increase output levels. Contractionary monetary policy (choice A) involves reducing the money supply and increasing interest rates, which may exacerbate the recessionary gap by reducing investment and consumption. An increase in taxes (choice B) or a decrease in government purchases (choice C) would both reduce aggregate demand, making the recessionary gap worse.

A Recessionary Gap Can Be Closed With