Suppose that 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 and close the recessionary gap by increasing real GDP. Decreasing taxes or increasing transfer payments may also increase aggregate demand but may not have as large of an impact as an increase in government purchases. An increase in government purchases paid for by an increase in taxes would have a neutral effect on aggregate demand as the increase in government purchases would be offset by the decrease in disposable income from increased taxes.

Suppose That the Economy Is in a Recessionary Gap