To close an expansionary gap using fiscal policy,the government can
A)increase government spending
B)increase government spending and decrease taxes at the same time
C)decrease taxes
D)decrease government spending or increase taxes
E)decrease government spending by the size of the gap

Question

Quizplus · Accepted Answer

To close an expansionary gap, the government needs to decrease aggregate demand. Option D is the correct choice because decreasing government spending or increasing taxes will directly decrease aggregate demand. In contrast, increasing government spending or decreasing taxes will increase aggregate demand, which will worsen the expansionary gap. Option B may temporarily boost consumption and investment, but it will lead to an increase in aggregate demand and create a larger gap in the long term. Option E is not feasible because reducing government spending by the size of the gap may be too drastic and potentially harmful to the economy.

To Close an Expansionary Gap Using Fiscal Policy,the Government Can