When the economy is in a recessionary gap, the government can improve economic outcomes by:
A) increasing taxes and aggregate spending via the multiplier.
B) increasing the money supply, lowering the interest rate, increasing investment spending and consumption spending, and thus increasing aggregate demand.
C) cutting government expenditure, decreasing investment spending and consumption spending, and thus increasing aggregate supply.
D) increasing nominal wages, shifting the short run aggregate supply to the left and thus removing the recessionary gap.

Question

Quizplus · Accepted Answer

When the economy is in a recessionary gap, there is a shortfall in aggregate demand. Thus, the government can use expansionary monetary policy by increasing the money supply, lowering the interest rate, and increasing investment and consumption spending. This will lead to an increase in aggregate demand and therefore output and employment levels. Option A may increase taxes but does not address the shortfall in aggregate demand. Option C may lead to further decreases in aggregate demand and worsen the recessionary gap. Option D may worsen the recessionary gap by shifting the short run aggregate supply curve to the left.

When the Economy Is in a Recessionary Gap, the Government