Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.

Question

Quizplus · Accepted Answer

An increase in government purchases will directly increase aggregate demand, leading to an increase in real GDP. A decrease in taxes would also increase aggregate demand, but the effect may not be as large as an increase in government purchases. An increase in transfer payments would increase disposable income and could lead to a multiplier effect on aggregate demand, but again, the effect may not be as large as an increase in government purchases. Option D, a combination of an increase in government purchases and an increase in taxes, may not have a net effect on aggregate demand and real GDP, as the increase in taxes may offset the increase in government purchases.

Suppose the Economy Is in a Recessionary Gap